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Mean reversion
Where does grid trading's profit come from, and where does the inventory risk sit?
Grid trading
What it bets
Price will travel back and forth between a ladder of fixed prices, so buying lower and selling higher can fill again and again.
How the rule is written
Above and below a base price, place a ladder of buy and sell orders at equal price steps or equal ratios. After a fill, place the reverse order on the neighboring rung, and earn the difference between rungs. The position is a stack of many small inventories.
When it fails
When price leaves the grid in one direction, one side keeps filling and the other side does not come back. Inventory grows. The profit from the gaps between rungs does not cover the loss on that inventory.
Do not confuse it with
Fading a range usually trades once near each boundary, and a stop outside the boundary says the range is over. A grid fills the inside of the range, and it often has no hard exit that shuts the whole grid down once a trend has started.