A “Safety Order” is a risk management tool used in trading, particularly within the context of automated trading systems or AI agents for trading.
The main purpose of a safety order is to average down the entry price of a position when the price is moving against it. If the price of an asset starts to fall after you’ve opened a position, safety orders can be set at lower price levels to buy more of the asset, thereby reducing the average entry price. The idea is that when the price eventually goes back up, it will hit the break-even point sooner, potentially reducing the time in which the trade is in a loss-making situation.
Here’s how you might set a safety order:
Select the Asset: Choose the asset you wish to trade.
Enter Your Position: Buy or sell the asset depending on your trading strategy.
Set the Safety Order Level: Decide on the price level at which you want the safety order to trigger. This is typically set at a price lower than the current market price for a buy position (or higher for a sell position), ensuring that you buy more of the asset (or sell more) if the price moves against your initial position.
Set the Safety Order Size: Determine how much more of the asset you want to buy (or sell) if the safety order is triggered. Some traders increase the size of each subsequent safety order to more aggressively average down the entry price.
Confirm the Order: Review all the details of your trade, including the safety order levels and sizes, and confirm the order.
Remember, while safety orders can potentially reduce losses and improve returns, they also increase your overall investment in a trade, which could lead to larger losses if the price continues to move against your position.
Like all trading strategies, they should be used judiciously and in alignment with your overall trading goals and risk tolerance.
As always, all trading involves risks, and you should only invest what you can afford to lose.