Crypto Academy / Season 3 / Week 8 - Homework Post for [@yohan2on] …Risk Management in Trading
Today's lesson covers a very important topic "Risk Management in Trading". Thank you Professor @yohan2on for letting us know about Risk Management in Trading through this lesson. I learned many unknown things. I hope the lesson will be helpful for everyone.
1- Define the following Trading terminologies;
- Buy stop
- Sell stop
- Buy limit
- Sell limit
- Trailing stop loss
- Margin call
(I will also expect an illustration for each of the first 4 terminologies listed above in addition to your explanation)
Buy stop
Buy stop is to buy an asset at price above the current market price. It may seem that this trade is disadvantageous and there is a loss. But in fact, it is possible to get a good profit from the trade after the resistance level break. After the resistance level break, the price of the coin will increase a lot.
In the screenshot, you can see the coin AXS resistance level and the market price also. The price of AXS is rising if you are interested to buy this coin then wait for the resistance breakout. After the resistance breakout, I marked where to place buy stop. After placing buy stop order the price continued to rally up and this trade will be profitable.
Sell stop
Sell Stop is just the opposite of buy stop. In sell stop, an asset buys at price below the current market price. When the support breaks then the coin decreases a lot and just below the support level at a certain point is good for a sell stop order.
In the screenshot, you can see the price of BNB started decreasing. If a trader is determined to sell BNB then he should wait for the support level break up. After the support break then the price of BNB will rapidly decrease. Below the support level at a certain point trader can set a sell stop and after decreasing the price of the asset he will be profitable.
Buy limit
Buy limit is a type of order where traders buy an asset below the current market price. Actually, the support level is the targeted area for a buy limit area. The market price is going up a lot now but traders are more interested in buying coins at discount prices.
In the screenshot, you can see the support level and market price. The price will drop into the support area at any time. This is the targeted place to order the buy limit.
Sell limit
In a sell limit order, if the asset that the trader wants to sell is more than the market price, then a sell limit order is created. This order is made from the resistance level. When the trader realizes that the trend strength in the market is low and the volume is not too high, then the price will not go up and the sell limit is ordered from there.
In the screenshot, you can see that the market is below the price resistance. But when it comes to resistance, sell limit order is created from there and due to trend strength and volume low, the price goes down, that is, profit from the trade.
Trailing stop loss
Trailing stops loss through trade step by step profit book by taking the market price up from entry price in a long trade, the possibility of loss will be zero through this operation. The cryptocurrency market is much more volatile. Due to high price fluctuations here, anything can happen in the market at any time. So there is a possibility of a big loss. In this case, it is very important to know the use of trailing stop loss. The illustration is shown below.
The screenshot shows that a long trade entry has been taken. At first, the stop loss was below the entry price. But after a while, it was seen that the trade has made a profit and the market is in bullish condition. This time stop-loss adjustment-1 is done. No matter where the market goes up or down, we have booked our profit. If the market is up again, stop loss adjustment-2 is made, it will be more profitable than before, thus will continue to take profit.
Margin call
Retailers do not have enough funds to trade. So we resist under brokers to trade. We can't trade because we don't have enough power. But brokers lend us a lot of money and we can trade.
Margin is an amount to be traded. Traders resist the broker with a fixed fee. He trades with margin on the amount given by the trader. Margin call is given when there is no free margin in any account. This means that the trader's account has become zero, so he has to re-deposit to trade. Brokers always do alert when margin level minimum condition is reached.
Practically demonstrate your understanding of Risk management in Trading.
- Briefly talk about Risk management
- Be creative (I will expect some illustrations)
- Use a Moving averages trading strategy on any of the crypto trading charts to demonstrate your understanding of Risk management. (screenshots needed)
Risk Management
Just as there are opportunities to make a lot of profit in trading, there are also risks. Rist cannot be completely prevented. But if some things are followed, this risk can be avoided. So it is very important to be able to do risk management, even if you face a loss, you can avoid a lot of big losses.
In the case of any type of trading, be it cryptocurrency, forex, or stock, one thing we must always keep in mind is that you cannot invest the necessary money of your family in trading. You always have to invest money in trading that is lost but does not affect your personal life.
We can never borrow, loan and trade. You have to do something with the money you have. It would be wise to trade with a maximum of 6-10%. If you want to be profitable, you have to gradually increase the amount of trading.
Risk management strategy can be divided into many categories. The three main ones are Portfolio management, Risk/Reward ratio, and Stop loss and take profit.
1 - Portfolio management
Many traders face losses due to not being able to do portfolio management properly. So the portfolio has to be arranged very wisely. We all know how risky it is to put all the eggs in one basket. Because in this case, if the basket falls on the ground, all the eggs will be destroyed at once. So it would be wise to use different baskets. In the case of trading, we can invest all our funds in multiple coins without investing in one coin. Because if there is a loss in 2/1 coins but there is profit in the rest, then we will not have any loss. But there will never be a loss of all the coins at once, it is very unlikely.
See in the screenshot above I have invested in 5 coins. Except for one coin, everything else is green. So before investing, you have to choose such good coins and invest in a few. If $500 is invested, it should be invested in 5 coins instead of investing $500 in one coin you can invest $100 in 5 different coins.
2 - Risk/Reward ratio
The risk-reward ratio usually depends on the trader. Some carry risk/reward of 1/1, 1/2, 1/3, 1/4. For new traders, it is recommended to use 1/1, risk-reward. Experts use a higher risk-reward ratio.
If we talk about the 1/3 risk/reward ratio then it can be said that if the price of a coin is $100 and we set stop loss at $80 then our take profit will be $160 according to the 1/3 ratio. I mean we want to lose $20 but we want to make $60 profit.
3 - Stop loss and take profit
Stop loss and take profit are important strategies for us. Stop-loss saves us from losing more if the price of any coin goes down a lot. Again, due to take profit, if the market goes up and goes to a certain position, the trade with profit becomes close. If not, there is a possibility of the market going up and down again.
Moving Average period = 50 (Short time)
Moving Average period = 200 (Long time)
As you can see in the screenshot of the BTC/USDT pair Golden cross occurs. The short-time 50 MA line now becomes strong support. The price is in bullish condition and has not fallen below 50 MA.
Buy Price : $43917.17
Stop Loss : $042642.77
Take Profit : $47740.37
Risk : Buy Price - Stop Loss = $43917.17 - $42642.77 = $1274.4
Reward: Take Profit - Buy Price = $47740.37 - $43917.17 = $3823.2
Risk/Reward : 1274.4/3823.2
Risk/Reward : 1/3
My risk/reward is 1/3 from the above calculation you already know that. I placed a buy order just above the support level. I set my stop loss just below the support level. I also marked the take profit level just below the resistance level.
Conclusion
The main goal of trading is to make a profit. But without proper risk management, good profit cannot be expected in trading. So you have to follow all the strategies of risk management and trade. Without proper risk management, trading and gambling is the same thing. From today's lesson, we have learned many trading terminology and risk management strategies.