Steemit Crypto Academy | Season 3 Week 8 - Risk Management in Trading

in SteemitCryptoAcademy3 years ago (edited)

Hello everyone,

It's a beautiful evening. How are we all doing? Hope we are doing great? It is another season this week and I have received a lecture from my amiable lecturer Prof. @yahan2on. It's a pleasure, sir.

This week, I will be answering some questions obtained from the class. Topics, "Risk Management in Trading" without wasting our time. Follow me as I take you on the journey.



QUESTIONS



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)

2 - 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)



ANSWERS



I will be explaining the terminologies listed above in the number (1) question. Some of the terminologies are strategies that can help traders to manage and control their trading from any loss which may occur during a trade. As we all know that know no indicator can give 100% accurate answers to trade, but knowing risk management accordingly can help us to minimize loss and to maximizing profit.

Buy Stop -

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A buy stop order can be defined as an order that gives instruction or instructs brokers to purchase a security when the price reaches the pre-specified stop price. The buy stop order is set at a level that is above the current market price, to take profit from the upward trend of a stock price. It price is set in advance.

Buy order is a strategy that is very good for traders to use on a trading breakout of a bullish trend. Bullish traders can set a buy stop order on a recent resistance level in the hope that the trade will go in their favor, after the consolidating period. I.e. with the belief that the predicted uptrend will continue to make new highs.

Let's look at an example, As a trader, am watching the price action of the AUD/USD pair, the market trend is going up. After when the previous trend makes a new high at 0.91679, the market is now indicating a bullish strong candlestick at 0.95679. I will set a buy stop order in advance with the belief that the uptrend will continue. However, A trader will set the buy stop order above the current market price. So, When AUD/USD price reaches the pre-specified price, the order will automatically be fulfilled.


Sell Stop -

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Sell stop order is an order that is set below the current price of a stock market, to exist market in case a downtrend occurs. This type of advance order can help traders to minimize loss.

Sell stop order is an order that is good to set, to minimize loss. A bearish trader can set a sell stop order on a trading breakout of a bearish period. Traders can now set a sell-buy order at a support level with the belief that the trends will continue in their downtrend.

The sell order is entered at a determined level. I.e. before setting this order the trader must have been determined or with the belief of losing a percentage of his/her capital or profit. Also, know that the order will remain pending until the price of the security reaches the pre-specified price.

For example, As a trader, am watching the price action of AUD/CAD, the trend is going down. The recent downtrend price action of AUD/CAD was at 0.98765, the price action is now consolidating at 0.96742, The trader will open a buy-sell order with the belief that the price will keep dropping below the current price. The order will be pending, but will automatically be fulfilled once the price reaches the pre-specified price.



Buy Limit -

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A buy limit order is an order that is placed below the current market price to buy at a lower price. This type of order is place as a pending order but will automatically fulfill when the price reaches the pre-specified price. This type of order is a good order that can make traders buy security or assets at a lower price. This order will be pending but fulfilled once the price reaches the pre-specified.

However, the order can help traders to buy at a lower price but the order will only be fulfilled if the price dropped to the price which has been set by the trader. This type of order makes you more patient and to be a less emotional trader. While setting the buy limit order does not mean it will be fulfilled. It will not be fulfilled if the price continues with the market uptrend. But will be only be fulfilled if the market trend downward.

For Example, we are looking at the price action of BTC/USD, the main trend is up and it previously makes a new high at $43,000, but if you know you can still buy it at a lower rate. You can set a buy limit order in advance, with the belief that its history will repeat itself. I.e. the price will still trend downward.



Sell Limit -

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A sell limit order is a pending order that is set on a chart above the current price to buy assets or security at a specific higher price when the market is trending down. We should also put in mind that, when a trader buys a limited order, it can only be fulfilled when the market price reaches the pre-specified price.

Sell limit order is a strategy that can be used to make profits. This is done by setting stop-limit order above the current price, at the point where the previous high trend of the market occurs, with the hope that after the downtrend of the market, the price will retrace back to the point or resistance level.

For example, as a trader, am watching a trade, ETH/USDT, the main trend is going down. The market hit a previous new low at $2,500 but the market is now consolidating at 2,623. With the prediction of the market, I now see that if the uptrend continues, it will hit 2,900 and later continue with the downtrend. I will now open a sell limit order at $2,900. Then, once the price gets to the pre-specified price, it will fulfill before the occurrence of another downtrend.



Trailing Stop Loss -

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Trailing stop loss is a strategy that helps traders to lock their profit. While also protecting traders from losses that may occur during trades. Trailing stop loss is an order that is made by traders. During trades, if a stop loss is set, it can help traders to minimize loss and also help them to gain more profit.

Trailing stop loss is similar to Stop loss but the difference there is that trailing stop-loss moves when the price moves in the favor of the trader. For example, you are in a trade, trading with BTC/USD pair, you now set a trailing stop loss. If the price trend moves upward, the trailing will also move upward but if the price moves downward it does not move. Trailing stop loss can be set to work automatically with most tradings and brokers. While it can also be monitored and be changed manually by the trader.



Margin Call -

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A margin call can be defined as a call that is issued by a brokerage firm to warn or to inform the trader that their brokerage balance has dropped more than the balance that is supposed to be there. A trader that gets a margin call must quickly deposit cash or securities to avoid the brokerage in selling his/her position in the firm. A margin call is normally applied to those that borrow money to trade (is called margin trading) and there must be a certain percentage of an asset that must be in their account before the brokerage firm can borrow trader.




Risk Management



If we should talk about risk management in trading, risk management can be defined as the process in which traders manage, control risk, and at the same time turn risk into reward ratio.

In trading, there is no trading strategy a trader can use that can give a 100% answer. I.e it does not matter how perfect a trader is, if the trader does not have good risk management techniques, he or she should be ready to sign for a huge loss.

When trading, a trader must put at the back of his/her mind how many percentages of his capital he/she is ready to lose. Because a trader must plan to lose, as he is planning to gain more profit. The knowledge of this alone can help to determine and minimize tension or any emotional disorder.

As I said earlier, that a trader must put the amount he is ready or willing to lose at the back of his mind. According to the rule of trading. As we know not every trade is profitable. You win some, you lose some. A Trader must know the percentage he/she is willing to lose.

In trading, most traders are willing to lose 1% of their trading capital. While some that can take risks will be willing to lose 2% of their capital. According to the rule of 1%, if traders open a trade with $20,000, he is must be willing to not more than $200 of their capital. While those that can take the risk for 2% will be willing not to lose more than $400 of their $20,000 capital. The 1% percentage must be strictly followed with other techniques that can help us to manage our trading risk very well.

Risk Management Techniques

I will be listing and explaining some risk management techniques that can be of help to traders to manage our trading risk effectively.

  • Planning your trades -

Planning is very important in every business. Is just like going for a war, Planning can distinguish between a success and a failure. In trading, it is very important to plan trades, Because it is the plan you will establish when you start trading, and not having a better understanding of what you are doing or what you are about to do can make one exist the market with a very huge loss or lose the entire capital. The

  • Take note of the 1% rule -

Following the 1% rule is very important. It can help traders to manage risks that may occur during trades. And for those that can afford 2%, traders like this always have a huge amount of capital in their trading account. But for those that have $10,000, it is advisable not to risk more than 1% of your capital which is $100. One percent rule is most used by day traders.

  • Setting stop loss and take profit -

Stop loss is said to be the price at which traders sell stock or assets and take loss in a trade. This mostly happens when a trade does not go in the favor of the trader. So, it is very important to set stop loss to minimize loss.

On the other hand, take profit order can be said to be a price in which a trader sells assets or stock and take profit on a trade. This mostly happens when the trader sees the trends in a way that, leaving the assets without setting take profit can result in a huge loss. So, traders set stop loss and take profit in advance and will automatically fulfill when it reaches the pre-specified price.



Use a Moving averages trading strategy on any of the crypto trading charts to demonstrate your understanding of Risk management.


I will be demonstrating my know about moving average. Firstly, I will explain how we can add moving average to our trading chart on tradingview.

Firstly, all we need to do is to visit the tradingview site here. It will display to us the main page of tradingview as we can see below.

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After that, at the upper part of the homepage as you can see above, click on chart. It will display a chart page. See below.

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On this page, click on the indicator, as you can see in a role at the upper part of the chart, in a line along with some chart features. It will now pop up a page where you can select the choice of your indicator.

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You can type the name of the indicator on the search engine, for you to locate it speedily. I search for Moving Average and I Clicked on it as you can see below. Once you clicked on it, it will display the moving average even before you close the indicator box.

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After when I have added it to my chart, I click on MA on the left side of the chart page to see its setting. I clicked on setting, it now displays what you can see in the above image.

As we can see in the above image, we set our indicator according to our choice. We can change the input, the style, and the visibility.

To explain my understanding of risk management, I will be using two moving averages. As you can see below.

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Moving average is a common indicator that is used by traders to determine the good time to enter market and when to exist market. Moving average is most commonly used to identify trends direction. A trader with the understanding of moving average indicator will know when to enter or exit the market according to the line direction.

In the above image, I used two moving averages. I set one (1) length to 200MA, while I set the second to 25MA. I set that on tradingview by clicking on MA, it shows me its features. So, I clicked on the setting icon. Under setting is where I changed the length, under input. You can see the process in my explanation which I displayed earlier, in the images.

The Moving average that I set at 200 lengths and trend below 25MA length, signify an uptrend. A trader with an understanding of moving average indicator will know the point where 200MA meets 25MA and 200MA, now trend below 25MA indicate an entry point, which can also be called a buy signal. While the point which 200MA crosses 25MA, and 200MA now trend above 25MA, signifies exist point which can also be called selling point. We can see the practical part of my explanation in the above image.



In conclusion, risk management in trading is the process of managing, identifying, accessing, and controlling risk or threats which may occur during trades. Applying risk management in trading is very important to minimize losses and maximize profit.

I want to use this medium to appreciate my amiable lecture for this wonderful topic, prof @yahan2on. I enjoyed the class and I look forward to receive more lectures from you, sir. Thanks for reading through my homework.

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Rating criteriaCalculation out of 2
Quality of presentation1/2
Originality2/2
Compliance with topic1/2
Clarity of language1/2
Quality of analysis1/2
Grand total6

You have plenty of grammatical and Typing errors in your work. Always proofread your work to rectify such areas before submitting it for review.

Thank you very much, Sir, I will always proofread before submitting. But sir, the ground total is not accurate with the score sir.

Sir, I have proofread and also make corrections to my mistakes.

Sorry for that, I have now rectified that slight score error. I already reviewed your work. Next time you will be more careful about the presentation quality of your article.

Okay sir, thank you

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