Crypto Academy / Season 3 / Week 8 - Homework Post for [@yohan2on] - RISK MANAGEMENT
Hello Crypto Prof @yohan2on !
I am profoundly humble participating in this week crypto academy task , after going through the lesson posted by @yohan2on i have learnt a lot about new trading strategies , below is my take on this weeks homework task.
1- Define the following Trading terminologies;
Trailing stop loss
- BUY STOP: This is a strategy that is used by traders to make profit and reduce the chance of losses, this strategy talks about why you should not enter the market instantly but study the trend of a bullish trend and enter the market at a price above the current market price , hence the trade is been executed immediately the price reaches the stop price set . practically let explore the chart below:
I set up my buy stop above the current price anticipating the price to get there before my trade is been executed should it go against my trade I have set up a stop loss to manage my risk, The current price is at 0.31866 and the resistance is at 0.3662 and I have also set up my Buy Stop at 0.44358 with a stop loss below the resistance at 0.3328 to reduce my losses.
-SELL STOP: This strategy is also in line with a bearish trend where by a trader decide to select a price below the current price , trades are executed once it hit that stop price , the stop loss here is set above the current price and take profit is also set below the stop price depending on where the trader want to leave the market .
From the chart above, let look at the bearish trend, the price was falling but had a resistance at a point where I ruled the red line, so I decided to set up a Sell stop below the red line using a green line, if the resistance should get broken and the price riches the stop price the trade will trigger automatically , and after it goes my way I will have to monitor and set a place depending on how I want it to take profit but if the trend reverses I have set up a position using a white as the stop loss.
- BUY LIMIT: This is a strategy used by traders to enter the market at a price lower than the current price of a particular coin , let say a coin is at $5 and you wait for the price to pull back to $4 a price below the current market price before you enter the trade , this is basically the Buy limit. With this kind of method the trade won’t be executed till the price goes down and hit the target set.
From the chart above, I decided to put a buy limit below the current price and the buy limit was placed at 0.26587 I used a yellow line to indicate that, below the buy limit was a stop loss it is possible that the bears can take over again so in case that happens I will exist the trade at 0.2000 and I will take profit when the price reaches the resistance.
- SELL LIMIT:In this procedure traders are looking forward to take advantage of the bearish price , traders set back and place a pending order at a price above the market price expecting the bearish trend to pull back and hit the target set to execute the trade, the order will be inactive until the pullback happens to hit that target.
From the chart above let say the bearish trend reached at a point called the first target which I circled with red and after a trader noticed that he decided to set a sell limit at 0.55 and a stop loss at 0.64 , after some time the price bounce up to hit the target set as a sell limit then the bearish trend continued this is a profit making time for such trader and the strategy used is called sell limit.
- TRAILING STOP LOSS: Here traders maximise their profit by shifting the stop loss set up either in a bullish or bearish trend trade, they adjust the stop loss price to a new price that Is above the entry price in that case even if the trend should reverse they will still be in profit.
Let say I entered a trade at $10 with a stop loss at $8 and within a day the price increased to 15$ I will then shift my stop loss to $12in this case I won’t lose if the stop loss is hit , so basically this is about limiting your losses and protecting the profit made.
MARGIN CALL:This is related to margin trading , where traders invest certain amount of money as collateral to be eligible for trading loans , the loan giving is used in trading and traders can use leverage to increase their profit same time this leverage can turn to losses .
Every broker has certain percentage of loss it give to it users such that when a traders account begin to drain the broker signals them with a call or notification to fund their accounts, this is the margin call.
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)
This is the most important topic that every serious trader is concern with because failure to manage risk properly is tantamount to your failure in the crypto world.
So many people define this as the problem of identifying risk, accessing it and taken precaution against it, now one thing every trader is aware of is the fact that the crypto market is volatile and every tool we use to outsmart the market like the indicators are also not 100 % perfect so in the course of action we have to manage our risk.
As a trader you have to take risk in the following aspect for a safe trade:
Entry and Exit point in trading
First of all let consider how to use the Capital we invest in trading but wait before you try to use any money make sure you do not put all your eggs in one basket , say you want to trade BTC and you have $50 in your account don’t use all to trade, take a percentage of it to enter the market , it is advisable to use 2-5% of your initial capital especially as a beginner because when you try a large percentage of this you might drain everything on your first time trading.
Now let use a chart and the Moving Average Indicator to try choosing our Entry and exist, Stop Loss and Take profit position with a careful risk management.
From the Chart above let do some analysis, first of all let consider the MA used, it was below the current price indicating a buy, I used Supertrend to confirm the signal the Moving average is giving me and the Supertrend also is giving me a buy sign.
As trader who want to minimize loss I have decided not to execute trade instantly but I placed a pending order at a price 0.365 above the current price, this is because I don’t want to go directly by what the indicators are saying they are not perfect.
Now let consider the stop loss it is place below the buy stop order just some few distance because the entire predictions can go wrong and that will bring a great disappointment if the loss is not controlled, one thing a trader shouldn’t do is to place the stop loss close to the entry price because the market is very volatile, in managing risk don’t be quick to quit the market you have to explore a bit.
Still on the stop loss will be employing the trailing stop loss strategy once I am in profit to reduce the risk of the price hitting below my entry price.
Finally let me talk about the take profit, here traders can be greedy, you don’t have to be a billionaire over one trade as it is said to rush t0 exist a trade I will also say don’t delay in taking away the little profit made.
Risk management is a perfect way to success, but knowing how to do it better will make you a good trader. At the end of this lesson I have learnt a lot to improve my trading skills with the likes of learning how to do Trailing stop loss and others mentioned by crypto prof @yohan2on.
Finally let me thank the entire Steemit team for bringing us this powerful lessons each week and let me thank all professors for their great job.