You begin to see that the optimization problem the bot is "heuristically" trying to solve is a problem of maximization of the PNL/DD^2 ratio under several constraints (max position, max DD, min frequency, and so on).
In essence, we could distinguish 2 main situations the bot has to deal with (in practice, often this neat separation of cases cannot be done at all, but it's just to explain ideas). One situation is just scalping within a "price corridor," and the other one is defending against price runaways when the price is "sliding" up or down, thus changing the scalping corridor.
Clearly, the bot must make as much as possible in the scalping corridors and hedge as much as possible during the price slide.
It is also essential to "keep in memory" (like card counting in the casino
) all the info about the hedging orders because every time the price is returning to a corridor, the bot can "undo" all the stop-loss orders by finally selling them in profit. In this way, in a larger timeframe, also the switch from a corridor to another and possible return, can be considered a form of scalping (across "corridors").
That is why it is essential that we stay in the market, ready to "undo" all previous losses.
The "layer" concept serves multiple purposes: explore multiple corridors but also to spread risk and reduce exposure, because multiple layers can have opposite positions on the same instruments, but the results of their action are algebraically adding up, and therefore, on average, there is a significant reduction of margins.
This is more noticeable in a simulation environment with extreme price movements and large "order clouds":
This also begins to answer the question about "risk management", as you can easily understand that the only way to estimate your maximum "risk" and general performances is through extensive simulation (say centuries of milliseconds tickdata from mixed stochastic processes).
Considering just 1 realization from the past (backtest) is silly, to say the least, and it's the stereotypical error of all people who first approach the problem, who begin to dream after a tightly "curve fitted" strategy based on some "indicator" that serves to "signal" open and close of trades.
