I would like to welcome everyone to the 7th week of the Steemit Crypto Academy. I would like to thank the professors who are putting exceptional efforts into teaching the community about the crypto industry, especially @reminiscence01. The professor has come up with a lecture on the most important topic which is risk management. He has very well explained tools and their importance in the lecture and provided homework tasks that I have done with sheer interest. I hope this community likes my homework post.

Crypto trading has emerged as a great way to earn dollars but not everyone can make a fortune as the market is extremely volatile and those with great trading and management skills can pioneer in this career. The trading strategy is a great way to predict the price and trade accordingly. It can give you a hefty amount of profit but there’s only 1 thing that is capable of saving those profit and capital which is risk management.

The word itself gives a brief about the concept. It is referred to the management of the capital as a novice trader can easily turn thousands of dollars into zero. However, if the risk is managed from the beginning, then not only it can minimize the loss but it will be considering increasing the capital as the profit booked in each trader will be more than the loss.

Risk management includes the use of numerous tools that are must understand in order to make sure that capital remains in profit even if a few of the setups goes negative. It is simply the process of controlling the trades in which we minimize the loss through the stop-loss tool and increase profit through taking profit tool while the risk-reward ratio is an equally important tool to consider to ensure that the reward is more than the taken risk.

The bottom line is that it is the technique to leverage several tools to cut down the chances of loss to a great extent and make sure to gain as much profit as possible while sustaining it.

Speaking of the importance of risk management, it has numerous great benefits that can improve the journey of crypto traders. The most important advantage of proper risk management is that safeguards the capital. It doesn’t matter which trading strategy is being used, what truly matters is booking profit and closing the position without crucial loss, and that’s what risk management is all about.

Emotions like greed and fear are the core enemy of the trader as they can badly affect the mindset and lead to more loss. Most traders after a series of loss open more positions by forcing the chart which is called “Revenge trading” which can lead to more loss. Proper risk management is the only thing that can help a trader to control its emotion and embrace the loss as a person know that stop loss will save the capital from serious loss.

The top benefit of risk management is that a trader gets more profits while the loss is nothing in comparison. If you open trades with twice the risk, then it can simply cover 2 failed setups. So, it means that if you make 5 trades in a day with a risk-reward ratio of 2:2 and only 2 of them hits the TP, then you will still be in profit as the reward will be more than the loss that occurred from the 3 lost setups.

It is one of the best risk management tools which helps in saving capital from horrendous loss. You might have observed that those people who start crypto trading tend to invest all their capital into a single trade and if such setups hit the stop loss, then a huge loss can occur. However, the 1% rule is the only tool that can minimize the loss as a trader will only invest one percent of its portfolio.

Before starting trading, a trader should decide which percent of the capital he/she will be investing per trade so that the entire capital won’t be affected by the loss of a single trade. Countless successful traders that I know prefer to invest only 1% as the loss is barely nothing and can be easily covered in another trade. I have covered illustrative examples also for better understanding.

Suppose that you have a capital of $100,000 and you have decided that you will only adhere to the 1% rule on every trade. Let’s calculate the number of dollars you will be risking each trade.

Risk per Trade = $100,000 X 1 / 100

Risk per Trade = $100,000 / 100

Risk per Trade = $1000

The above calculation indicates that you will be risking $1000 per trade which gives you the margin of 100 failed trades to turn the capital to $0 which is actually impossible. So, if you open 5 trades a day with a risk-reward ratio of 2:2 and 3 hits the stop loss, then your actual capital will become $97000. However, if 2 trades hit TP, then you will get a profit of $4000. So. Overall your capital will be $101,000.

That’s the power of the 1% rule, even if 3 trades fail to hit the TP, then the loss won’t be much and that can be covered by the successful trades if the RR is more than the risk.

Even if you are applying the 1% rule in your trades, then it can safeguard your capital from sudden loss but the risk-reward ratio is the tool that can help you to recover the loss amount and gain profit. This tool will help you to decide what amount you will risk per trade and what reward you will get when the trade hits the TP. The beginners don’t pay attention to RR due to which they risk more amount than the reward and that makes a negative effect on the capital.

At the start, a trader has to decide risk-reward ratio and it should be always more than 1:1 because the risk equal to reward won’t be much beneficial. An average trader should opt for either 1:5 or 2:2 so that a single trade can cover the loss of more than a single failed trade.

Let’s take a look at the illustrative example for better insight into this tool.

Now consider that you open an account with the capital of $1000 and decide RR of 2:2 which means that the reward is twice the risk taken. So, that means you are risking $100 per trade and you can get $200 on the hit of TP. The risk is taking worth because reward is handsome amount but if you start trading with RR of 1:1, then it will be pretty much useless as there won’t be enough profit.

Stoploss and take profit is the act of exiting the setup either in loss or profit. Once we enter a trade and decide the RR price, then we have to place stop loss so that the setup can be closed once the price reaches the risked amount. It minimizes the loss as the trade will be instantly closed. The take profit is used to close the trade in profit when the asset reaches the predicted area. Both tools are very important in risk management because a trader won’t have to sit in front of the chart and they also give confidence that the loss will be minimal and the profit will be instantly booked. Every trade should make use of these tools to secure its capital. It minimizes the loss according to the risk a person is taking and helps in making the desired profit.

Let’s head to the illustrative example for a better understanding.

Let’s start with stop loss, it depends on the strategy but most traders prefer to place it according to support and resistance. The reason is that prices tend to bounce from that specific area which gives chance to hit the TP easily. When it’s about placing take profit, it can be also placed according to support and resistance but always remember that RR should be considered while doing so. That’s how you can make use of this trade and manage your risk.

a) Trend Reversal using Market Structure.
b) Trend Continuation using Market Structure.

The following are expected from the trade.