Crytpo Academy Season 3 Week 8||Homework post for Prof. @yohan2on by @cinnymartins
So I will be making my assignment post today based on the following requests of the professor.
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)
Define the following Trading terminologies;
Buy stop
Buy stop is a trading terminology used to describe a trading tool that traders employ in their trading transactions. In trading there is such thing as a trader setting a price to buy a particular asset immediately and there is yet another thing as placing a pending order at a particular price which tends to execute as soon as the market price gets to that rate. This is what we refer to as a Buy stop .
That being said, A Buy stop is a trading technique in which the buyer places a pending order to execute automatically when the market price gets to that point. Everly, traders are quite uncertain about the market next move and thus it becomes hard if not almost difficult to predict a market trend. So, when a trader places an order using buy stop, he places a pending order of which the broker gets to purchase a particular asset as soon as the asset hits that particular price.
The trader places his asset in a buy stop in anticipation that the market will go or continue going towards the bullish trend. To do this, the trader gets to place such order above the current market price. In placing such order, the buyer also has the Take loss which helps minimize the losses of the trader depending on the market trend and the Take profit which also reserves the profit accruing to the trader incase the market hits his desired price and still slopes downwards.
The image above has a reflection of Buy stop order on my chart detected by the green dotted line on which the arrow points.
Sell stop
This is also a trading technique just like the buy stop but in the opposite direction. The trader uses this technique whenever he wants to sell his assets. Just the same way he places the buy stop order, the seller gets to place a sell stop order at a particular price in which he wishes to sell his asset upon which it sells automatically when the market price gets to that point.
Sell stop is a pending order placed at a particular price which executes the moment the market price gets to that price. Unlike the buy stop, this order is set below the market price and it is usually placed when the market price is gravitating towards the bearish trend.
From the picture above, the sell stop level is indicators by the dotted green lines and the red arrow below the asset's current market price.
Buy limit
A buy limit is a trading technique similar to sell stop in the sense that it is usually placed below current market price. When an order is placed using the buy limit, it automatically sell once the price gets to that rate. Traders usually employ this tool when they expect the market price to reach a particular level and then reverse.
Worthy of note is the fact that buy limit occurs when the price is trending upwards.
Sell limit
This is the opposite of buy limit in that is usually placed above the current market price. And with this, the asset automatically sell off when the price reaches that level. This type of order is usually placed when there is a bullish trend or when the price is taking a reversal level from the resistance to continue in its fore direction.
It is also a pending order not instantly executed but allowing the trader sell at his stead. With the sell limit order, the trader stands the chance of buying his desired asset cheaper even below the current market price.
So, the sell limit order placed above the market current price is reflected on the chart above with the green dotted lines.
Trailing stop loss
This is another type of trading technique employed by traders to shield his assets from the risk of abrupt losses. It is risk management tool employed by traders to lock in profits. Regarding the manifold risks involved in trading, traders tend to use this strategy to reduce those risks to the barest minimum.
Trailing stop loss is a trading technique used in modifying an order. It helps the trader set and manage his risk level on a trade. The trailing stop loss is used in both upward and downward trend. It adjusts the stop price at a specified percentage below or above the current market price.
Margin call
This is a special kind of trading technique in which the trader must have a certain amount in his account of which failure to do so alerts him to deposit into the account. This call comes with a demand on the investor to top up his account.
When an account undergoes losses simultaneously and falls below the margin, a demand in form of a margin call is placed in the investor to either replenish his account or close it down. Let me explain...
Using the Nigerian banking institution as an example, there are different kinds of account an individual can open. Some comes with a higher demand financially of which when the customer after the first deposit decides to attend to his financial needs or maybe in event of bankruptcy the bank will order him to shut down the account or finance it as it is running below the minimum standard.
That being said, a margin call Is made whenever there is a decrease in the value of the investor's margin account.
Practically demonstrate your understanding of Risk management in Trading. Briefly talk about Risk management Be creative (I will expect some illustrations)
Risk management
Risk management is a strategy employed almost in all areas of life. Risk is inevitable in every endeavor but there is such thing as managing ones risk. In trading, a trader is bound to make losses as much as profits but the risk management strategy is there to guide him as the market unravels its fate.
Risk management is a trading technique that is used to control losses in trading and maximizing profits. Ample risk management strategy is worth having the knowledge before a trader starts trading with his personal account funded.
Here are some of the techniques employed in risk management:
Building a trading plan
Stop loss and take profit strategy
Risk reward ratio.
Building a trading plan
Planning is a very pivotal aspect of trading and this is the very first strategy every trader must come up with. When a trader fails to make necessary plannings, it leads to him loosing almost all his capital.
When planning, a trader should make plans that is within his risk management level and the type of trading he wants to embark on. All these details helps the trader to strategize and restrategize as the case may be in his take profit and stop loss position.
- Stop loss and take profit
This also is a trading technique used in trading to ensure limited losses in the case of stop loss and it is placed below the buy order. Talking about take profit, traders employ it to take profit they've already had at hand as they can't predict what the market next move would be.
- Risk reward ratio
Traders risk management level varies in the sense that traders are willing to take risk based on the amount they deposited. So, every trader has a risk management level different from others, let me explain...
A trader who has a deposit of $100 in his account cannot expect a loss above $100 and vice versa.
Conclusion
In the course of the lecture and making my assignment post I got to learn a lot which include placing a sell limit order,buy limit order and others listed. I also got to understand more on the concept of Risk management and how it works on trading platform and it's essence to the trader.