3Commas has a feature called Safety Orders (SO) and they are a key part of many trading strategies. Whilst 3Commas use the term Safety Order, a more commonly used term is Dollar Cost Averaging (DCA). Correct use of SO’s / DCA can make the difference between being profitable and not.
Many traders assume that the more SO’s the better – afterall, they are called ‘safety orders’, but this is not necessarily the case. Using many SO’s usually means the base order needs to be small – and if all the SO’s are used this can lead to an oversized trade, which still moves against you. However if the SO’s remain unused and the base order was small because of the many SO’s, then the profit from the trade is smaller than it could have been.
How does a SO or DCA work?
Let’s say you buy 1 coin X at $9 and the price of your coin drops to $4.50, your trade is now at a 50% loss.
Dollar-cost averaging (or SO’s) would, for example, buy 3 times this coin X at $4.50.
So now you have spent $4.50 x 3 + your initial $9 and you end up with 4 coins.
This means your average cost per coin now is ($4.50 x 3 + $9) / 4 or $5.625
The trade loss is now $5.625 -$4.50 = $1.125 per coin instead of $4.5 per coin.
This means if the market goes up to $5.611 you’ll be break-even and likely go into take profit. No need to wait it out until $9.
Keiko Long generally uses 3 Safety Orders, but it does depend on the specific strategy, so always check the particular signal setup instructions. We have tested many other settings, 3 is the most profitable when combined with Keiko Long signals. This tends to be because if things drop further than 3, then often they keep going, and 4 / 5 safety orders will not get you out of the trade, but in deeper. Each SO adds to the trade and in doing so the SO gets larger and larger.
Here is an example of one of our test bots on a BTC-AE trade.
This runs live with 4 safety orders. The 4th safety order was entered by the bot, but has done nothing to help the trade take profit. Instead the value kept falling.
The same trade with the bot running only 3 safety orders can get a far better entry for a manual 4th safety order, and therefore bring you to profit quicker.
Many of these BTC moves are designed to get retail traders caught up, stopped out and generally frustrated. The best strategy is to trade small and across multiple pairs, then whilst some trades are ‘stuck’ others can still be returning a profit and building the account.
When to place another Safety Order
Unfortunately, there is no absolute rule and different coins require a different % change in order to best use a further SO. There are also different considerations if you are margin, spot, futures, etc trading. Generally speaking, traders tend to enter additional SO’s too early and unnecessarily use up their funds before the market turns around (see example above).
Also, consider what multiplier you apply to your SO. For the greatest impact, you need to use a multiple of the total trade size. A safety order of x1 will have little impact on moving the position close to profit, whereas adding an additional position which is 3x, 5x or even 10x the existing trade size will have more impact. Although if you enter too early and have not traded small to begin with, you may find you run out of funds before SO’s are effective. The key is to have a small trade so that you are able to hit the drawdown with a substantial additional SO.
Usually, we start to monitor the charts when there is a 10% / 15% / 20% price movement against the trade we are in after all the automated SO’s are in place. Often we wait for further decline, possibly to as much as -30% / -40%+. For leveraged tokens the numbers are multiplied, so for example with a 3x token, -30% becomes -90%. Some Alts, especially low volume and if shorting can easily move 100%, 200%, so there is no one answer as to when to DCA. A trade size that is too large for the account and not leaving enough funds to add additional SOs is one of the many reasons a trader may fail.
We look to the longer-term charts such as 4hr, 8hr, 12hr, and daily for suitable support or resistance as potential areas to place a 4th or even 5th SO. You could also look at the Average Daily Range of a particular coin as a guide to the % movements a particular coin may make. Another popular technique is to look for Fibonacci levels.
Meanwhile, we can open up another bot running the pair to continue to profit from the new signals. The key to this, as with most trading is to be working at a trade size that is not too large for your account size.
A more aggressive strategy is, after a sharp drop, maybe 5% / 10% to add a large SO, perhaps as much as 10x, to catch a bounce. The risk is ending up with a 10x’d trade which continues to move against you. So as always, trade small and manage risk.
Another alternative is to use a Stop Loss. This is something we do not do when trading our own signals for reasons explained here, but every trader should consider the risks involved. If you are trading margin or leveraged products, the risk is further increased.