Crypto Academy Season 3 Week 8 I Homework for @yohan2on I Risk Management in Trading

Greeting to all. This week lecture is all about the risk management. I read the lecture and now writing my homework after conducting the required research on the given questions.

1- Define the following Trading terminologies;

Buy stop
Sell stop
Buy limit
Sell limit
Trailing stop loss
Margin call

This is a buy order which is placed when the price of coin rise from the current price. A limit is set by the buyer. When the price of coin cross that limit and start moving upward, the order is executed. This type of order is executed when market start moving upward.

This may look a non profitable trading for new comers but in actual, its a strategy which is applied by most of the traders. When the resistance level is broken, the order executed. After crossing the buy limit, the price usually move upward.

In the above graph, we can see that the market is at its uptrend. The price of coin is rising. I placed the order a bit above than the resistance level.

The buy stop is another strategy which is mostly used by the traders in crypto world. This strategy safe them from lose. In Buy Stop, the investors set a limit. They sell their coins a bit low price than the current price of coin. Whenever the support level will be broken, our order will be executed.

It may seem a lose for new comers but it is not in most of situations. When the coin start downtrending and price hit your limit, the sell order executed.

The investors always want to buy the coin when the price of coin is low. The Buy Limit is the order placed by the traders. This order execute when the price of the coin fall down. The order is placed at the price lower than the current price. The traders place this order and when price fall to the limit, the order execute.

Sell limit is opposite to the Buy limit. Many people get confuse between these two. The sell order placed at the price which is high then the current price. The traders set a limit. They think that the price will rise and then downtrend start. They set a limit and when price reach to that limit, the order execute and they sell their coins.

The purpose of this strategy is to safe money from lose. The traders have thoughts that the price of coin will move downward after a certain increment. So they set a limit above than current price where they sell their coins.

The trading is greatly risky. Here you can make money within short period of time. But chances of losing money are always there and we cannot denied them. In margin trading, if an investor is losing his invested money, then he received a call by the broker. The broker instruct the investor to save him from further lose.

The margin call is happen when the specific conditions fulfill. The broker then contact with the investors via Mobile phone, email, message and instruct him to stable his position in market.

The investors always manage the risk in such a way that the chances of loses money get minimum. He should not make the things worse enough to get margin call from broker because this show that you already have a great lose and now Brokers want to warn you to lose your remaining investment. Always do research, use indicator to predict the future, study the market proper and have proper risk management to do the trading successfully.

The Trailing stop lose is another way to safe the investors from losing their money. The purpose of this technique is to safe the investor from lose and increase the profit chances for them.

In such type of trading, if the market is moving upward, the trader continue trading. In this case they keep earning the reward. But if market start moving downward, they quit their trading at the current price and exit from the market.

In this way they their lose is minimum if market start falling and they can earn high profit if market move upward. Here the stop loss and take profit ratio is nearly equal which is 1:1 mostly. There are equal chances of earning reward or losing investment.

If you trade with trailing stop lose, your lose will be much lower and you will make high profit too. In trailing stop lose, the chances of losing money is much lower especially in volatile market. Where the fluctuation in price is high, the trailing stop loss work more efficiently.

If the market is in the traders favor, they continue to do the trading and profit is secured. But if market take a reverse and change with a specific percentage, they quit the trading and safe from lose.

In trailing stop lose, let suppose the market is moving upward. The price of coin is rising and currently its price is 30 USDT. The Trailing stop loss will also be 30USDT. If market will be in favor of trader, they continue to raise the profit and earn reward. But after every uptrend, their is downtrend. Now if market change with a specific percentage and start moving downward, the stop loss will not move downward. It will be same as previous(30USDT). So in downward condition, the trading will stop and trader will secure from lose of their assets.

Trading with trailing stop lose is profitable in most of the cases. The traders earn great and success ratio is high.

2 - Practically demonstrate your understanding of Risk management in Trading.

Risk management is most important factor which we need to keep in our consideration before investing our money in crypto world. The traders always have plans and precautions to perform the trading in safe way. The risk management is a set of rule which is set by the trader himself. He should follow these rules to avoid the risk and to safe his money.

The risk management strategies safe the traders from losing his money. If a trader do not follow those strategies, he would not be able to end up with trading in a successful way. The chances of losing money and threats would be higher in that case.

We should properly follow the risk management techniques in order to safe ourselves from threats of lose.

Planning

The most important things before entering into the market is a proper planning. Plan your trading mean you must a a proper schedule of your trading. You must have knowledge how much money you can afford to invest? For how much duration you want to invest?

For example you have planned to make investment for 2 month. After ten day, you wake up and see that the price of coin has raised to 3x than you purchased. You get exited and sold your coins. After that you see that the price of coin is rising continuously and has reached to the peak. Now you will regret on your decision. So always follow your rules and planning. Do not get panic or excited.

Portfolio

Manage your portfolio in a proper way and planning. Managing the Portfolio mean how much coins you have invested in. You should invest all your money in the same coin. If you invest in a single coin and if coin start moving downward, you will lose all your money. he trader depend on solely on that coin movement.

Instead, if you have invested your money in 5 to 6 different coins after proper analyzes, and if one coin fall, there would be 5 coins left and you can earn profit out of them.

You can see in above screen short, i have not invested all my money in the same coin. I have divided my investment in multiple coins.

Risk/Reward Ratio

This is the ratio of our profit and risk rate. This define the how much reward you will earn in return of the risk you take in market. Most of the people set the Risk reward ratio as 1:2, 1:3 and 1:4.

If you have invested 1000 dollar in any coin and set the Risk Reward ratio as 1:2, then you will set your risk rate at 800$ and take profit at 1200$. In case of market uptrend, we will earn 200$ and if market goes down, we will lose 200$.

If you have invested 1000$ and set the risk reward ratio as 1:3, then you will set the risk rate at 800$ and take profit as 1400$. In case of market uptrend, we will earn 400$ and if market goes down, we will lose 200$.

One Percent Rule

This is also a common rule which the traders follow to save them from any big lose. They set their lose only to one percent and do not tolerate lose more than that. If you have invested 100 dollars in a coin, you will bear the lose only on 1 dollar and no more than that.

Stop lose and Take profit

Stop lose and take profit, these two are very important factor which we take into our consideration while trading. These two rules save us from any big lose and we wind up our trading in a successful way.

The main goal of setting the stop lose is to safe ourselves any further lose. from Stop lose is set below to the current price of coin. Suppose you have invested in a coin and market is at its uptrend, you set the stop lose below to the current price of asset. Then market trend reverse and price start falling. When the price reach to your stop lose level, your sell order will be executed and you will safe from any further lose.

In take profit, you set a price above then the market current price. When price reach there, your order is executed and you get your reward.

I will try to explain this using the Cardano USDT. I applied the EMA 20 and 200 on the chart.

You can see in above graph that there was a Golden cross on . After that price continued to rise. Suppose i bough the coin at 1 $. Stop loss is 0.5$ and take profit i set was 2 $.

Buy price= 1 $
Stop loss= 0.5$
Take profit= 2 $

Risk reward ratio=?

BP _ SL=1_0.5=0.5

TP _ BP=2-1=1

R/R ratio = 0.5/1

R/R ratio=1/2

The risk management in very important while stepping in the crypto market. You cannot wind up the trading successfully without the risk management strategies. You should follow the strategies carefully and do the proper analyzes before entering into the market. I am very thankful to the respected professor @yohan2on and @yousafharoonkhan.

Regard
@farooq2923