Grid systems: the hidden tail in the pretty equity curve

[Amanhasnoname]

A grid places buy and sell orders at regular intervals around the price, profiting from oscillation. In ranging markets it generates steady small gains. Many scalpers are drawn to its apparent consistency.

The weakness is trending markets. As price moves in one direction, the grid accumulates positions against it. The floating loss grows, margin is consumed, and eventually the account is forced out or suffers a large loss.

Backtests across calm periods look excellent. The first strong trend or gap reveals the structure of the risk: many small wins and one catastrophic loss.

The risk is measurable. Compute the maximum adverse excursion: how far could price move before margin runs out, given the grid spacing and lot size? Compare that with historical moves on the pair, including the worst cases.

Safeguards include hard stops on the grid as a whole, limits on the number of levels, and size that keeps total risk within a small percentage.

A grid is a way of selling tail risk. Knowing the size of that tail is essential.

What does the worst historical move imply for the maximum drawdown of a grid with the current settings?