Comparing a strategy with and without Safety Orders

One important thing when day trading or scalping is risk management. To find the good balance between risk and reward.

So I compared the same strategy with and without Safety Orders.

Here's an idea explaining how safety orders work if you didn't know:

The strategy used for this example is a daily pivot & consolidation breakout.

Before I explain the results, a few definitions:

Net profit = Gross Profit - Gross Loss. Basically the total profit earned by winning trades minus the losing trades.
Percent Profitable = Percentage of winning trades divided by losing trades. I like to call it the winrate.
Profit Factor = Profits divided by Losses. It tells how many times your profit is bigger than your loss. A strategy becomes profitable when the profit factor is greater than 1.
Max Drawdown = Maximum consecutive losses. AKA, the biggest lose streak. A good indicator of how risky your strategy can be.

A last few details:
Both strategies have an intial capital of 10 000 €, 0.1% commission on each trade, and each order is a market one, to make sure everything gets filled.

█ STRATEGY 1 - Take Profit & Trailing Stop Loss

The strategy has a 7% Take profit and a Trailing Stop Loss that starts at 11%.
Each order buys with the total capital without compounding (fixed 10k €)


With 52 trades closed, the strategy has a profit % of 147. It suffered a max % drop of 15.5%. The profit factor is of 2.19. And finally, the winrate is 76.9%


█ STRATEGY 2 - Take Profit & Safety Orders + Stop Loss

The strategy has a 7% Take profit, 10 Safety Orders, each spaced by a 1% step, and a stop loss at 11%.
Now the base order will only buy 100 €, while each safety order will buy 990 €. This is to ensure that the total capital is used and not more.
Also note that the take profit is based on total trading volume. As the safety orders get filled, the target drops a bit lower.


With 263 trades closed, which is due to the safety orders (5 per trade in average), the profit % drops to 79. That is almost half of strategy 1. But, the max % drop is divided by more than 2: only 6.9%! The profit factor almost doubled, as it is now at 3.8. Also, the Percent profitable increased to 83.6%.

█ CONCLUSION

This comparison is just an example. I did this little process over hundreds of strategies and the outcome is always the same: safety orders reduce the risk, even though they also reduce the net profit a bit, the overall profit factor is increased.

So should you use them? It is up to you, but my answer is a big yes.

Tips on automation:
The simplest way to automate this is to place the safety orders using limit orders when the entry alert is received. Then close all deals upon take profit.
If you want to use market orders, you'll have to place each safety order as the price drops through the steps.

Indicators used in this example have restricted access. See my profile signature for more info.

The backtest results for this pair are shown below.