Steemit Crypto Academy | Season 3 Week 8 | Homework Post for Pro.@yohan2on | Risk Management In Trading
Thank you very much Prof.@yohan2on for your wonderful lecture on managing risk. I learned a lot.
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)
Buy Stop
The Buy Stop order is the type of market order placed when there is an uptrend in the market. When you place a Buy Stop order, it means you have placed a pending order that has been set at a particular market price. The order is set at a price higher than the current market price and when the price of the asset reaches the set price the order is triggered. The order will keep pending or remain open if the set price is not reached.
A bullish or uptrend market is where a Buy Stop order is placed, otherwise, it is not likely to be successful. It is used to trade in a very volatile market.
How to place a Buy Stop order
To place a buy-stop order, go to Meta trader. Select the trading pair of your choice.
Next, right-click on the space of the chart where you want to set the price to show a menu. From the options select trading, a cascade menu will be shown. Choose Buy stop.
It can be seen that the order has been placed successfully.
Sell Stop
The sell stop order is the opposite of the buy stop order. This type of order is also a pending order but this time around, the order is set below the market price. The order is triggered when the set price is reached. A bearish or downtrend market is where it is placed.
For the order to be successful, it should be placed on an asset that is selling or down-trending. The order is then placed below the market price. If the market price fails to reach the set price, the order keeps pending in the order book.
How to place a Sell Stop order
Right-click on the space of the chart where you want to set the price. From the options select trading. Choose Sell Stop.
The sell stop order will be placed immediately.
Buy Limit
This order is also a pending order set to be executed in the future. It is used to place a long or buy position in trading. This order enables traders or investors to buy an asset at their own price instead of the current market price that will be executed at the spot. The buy limit order is set below the present market price of the asset. This way, the asset is purchased at a very low price if the order is triggered.
It is used by moderate traders and investors to gain assets at low prices to prevent failures.
How to place a Buy Limit order
Right click at the point you want to set the order, it should be below the current market price. select trading from the options and select buy limit from the option that will open.
The order will be placed immediately.
Sell Limit
This is a sell or short order in trading. It is used when you plan to sell your asset greater than the current market price. The order is automatically triggered when the set price is reached and the asset is sold automatically. This way, traders are able to sell the asset at their own price.
This order is placed when the market trend is bearish and they expect the price to give a retest of a particular area before it continues in its movement, if the expectation comes true, the order becomes successful.
How to place a Sell Limit order
Right-click on the spot you want to place the order. Then select trading and sell limit order.
The order will be placed and executed if the price condition is met.
Trailing Stop Loss
It is a trading technique that investors or traders use to lock in their profits and protect their day trading losses. It let the trader set the percentage of loss that they can receive on a trade. If the price of the asset moves in the favour of the trader, the stop price goes with it but if it moves in the direction that does not favor the trader, the stop loss does not move.
For instance, if the price rises 15 cents, the stop loss will also follow up 15 cents. However, if the price falls, the stop loss stays in place.
Margin Call
When a margin account runs low on funds mostly because of a trade that is going against the order, a notification is sent to the trader to deposit more funds or close their current position. This usually happens when the account losses below the margin level.
Margin trading is basically borrowing funds to trade. There is supposed to be a certain amount of funds in the account, if the amount available is not up to the expected amount, a notification (margin call) is sent to the trader to top up or close their position.
What is Risk Management
Risk is the uncertainty concerning the occurrence of an event that may cause loss. Therefore, risk management is the technique, measures, or strategy put in place to curb the negative effect that a risk (uncertain event) might cause.
It is very essential in trading and every trader should have enough knowledge about risk management to prevent huge and unaffordable losses that may come from unforeseen situations. One of the vital things a trader should know before commencing trading is risk management, else he may lose a lot of money that can easily be prevented by risk management techniques.
Some risk management techniques
There are a lot of options to choose from when you want to manage risk. Here are some of them.
• The one percent (1%) rule
This rule states that a trader should be ready to lose 1% of their funds on a trade and should stop the trade if the loss is going more than that. For instance, if a trader opens a trade with $300, he should set 1% of it as the amount he can afford to lose in case the trade does not go as planned, that will be $3 and nothing more. This will help in protecting the capital from loss in this fluctuating market.
• Risk/Reward ratio
This technique is a very good risk management strategy for traders. We all know that risk is directly proportional to profit which means the greater the risk, the greater the reward. Sometimes traders set eyes on the rewards and ignore the risk involved and this can bring a lot of negative consequences.
The risk-reward ratio can help prevent this by allowing the trader to set the risk he is willing to take against the rewards involved. A trader can choose any ratio he prefers such as 1/3, 1/4, 1/5. For instance, if he chooses to go with 1/3 for an asset that is worth $100, then the trader is willing to make a $300 profit or lose $100. Also, if he chooses 1/2, then he is willing to make a $200 profit or lose $100.
I set a long position using a 0.68 Risk/reward ratio on a trade.
• Stop Loss
This technique is one of the effective ways to control risk. This enables traders to prevent the execution of a trade that is going against the trader. The order is set below the market price in a downtrend market and when the set price is reached the order is executed.
• Trailing Stop Loss
This technique has already been explained above. As I explained earlier, it allows investors or traders to lock in their profits and protect their day trading losses. If the price of the asset moves in the favour or against the trader, the stop price is adjusted to go with it if it’s in favour of the trader and the stop loss doesn’t move if it’s going against the trader.
• Take Profit
This is a form of a pending order that allows the trader to set the exact price at which he wants to close a position when it reaches a certain profit level. If the set price is not reached the order fails to execute. This makes the technique a very good risk management strategy.
Using Moving averages trading strategy on any of the crypto trading charts to demonstrate the understanding of Risk management.
Moving averages are trading tools used to determine the price trend of an asset on the market. It can also be a useful risk management technique if used in the right way.
First I’ll demonstrate how to add it to a chart.
For the best result, it is recommended to use two moving averages, a long-term moving average, and a short-term moving average. I will be using 50MA as my short term and 200MA as my long term.
To begin, visit tradingview.com and click on chart on the page.
Select on fx indicators to open the indicators section.
Search for moving average in the box and select Moving Average.
Select it twice to display two moving averages on the chart. Select the settings to show the options for editing the moving average.
Set the length of one of the moving averages to 200 as long-term and the other to 50 as short-term.
It is recommended to change the style between them to differentiate them. To do that go to the style section and change to any preferred color. I chose orange for my 50 MA.
And the indicators will be shown on the chart.
When the short-term line crosses the long-term line from below, it means an uptrend is about to happen and it is good to enter the market but when the short-term crosses from above, a downtrend is about to happen and the trader should exit immediately.
Here, the short-term MA can be seen crossing the long-term MA from below, so an uptrend should be expected. This way, you place a buy stop order above the price and if the uptrend reaches the set price the order is closed and you end up with a profit.
It can be seen how effective the combination of these techniques can be used to manage risk.
Conclusion
As a good trader, you should be equipped with risk management techniques to help manage the loss of your funds. Losing funds that you could not lose in a trade can be a very sad thing to experience, especially when it could be prevented by a risk management strategy. That is why it is very important to study and understand the concept of risk management and also learn about the various risk management strategies.
Thank you
Hi
Thanks for participating in the Steemit Crypto Academy
Feedback
This is good content. Well done with your practical study on Risk management.
Thank you Prof