STEEMIT CRYPTO ACADEMY S5-W7::HOMEWORK POST ON:RISK MANAGEMENT & TRADING CRITERIA: BY @GI-DE-ON::
Season Greetings Everyone
I would like to say a big thank you to God for this opportunity of being here today alive and sound, being able to be part of this week's homework post.
A big thank you to God for having brought us all this far. It's yet another wonderful week, I pray for a better week ahead and a wonderful new year ahead.
INTRODUCTION
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Having been focusing on various trading techniques and analysis on how to make a successful trading by proper application of these techniques and tools on the previous weeks lessons, this has proven very productive in the applications. It will be important to know that application of all these techniques and trading strategies will not yield more productive results without proper Risk Management implemented on the trading market.
This brings us to this week's lesson, which is about Risk Management. Hence, detail of this topic will be discussed in the subsequent paragraphs below.
What do you understand by "Risk Management"? What is the importance of risk management in Crypto Trading?.Having been able to understand the various uses and applications of numerous trading strategies, techniques and trading styles that will aid lead to successful trading in the crypto market, it is therefore not a 100% guarantee that trading will be very much successful.
This is as a result of absence or lack of proper risk management and poor control of emotions. With the proper management skill implemented to manage risk present in trading the crypto market and proper utilization of various trading skills, techniques and various trading Styles with good use of various trading indicators, then a trader will be read assured of 99.9% success in trading the crypto market.
Risk Management is one important factor that is to be very much considered before going into any aspect of life, either trading in various ways, even outside the crypto market. Life itself is full of risk, likewise trading it is therefore on us to know the proper ways to management any risk encountered, so we wouldn't be stock in a fixed. This is also very much applicable to trading the crypto market.
Proper management of risk will therefore lead to good profit maximization and reduces the possibility of losses in trading the crypto market. With the above said, it will be wise to back all this with a proper definition of Risk Management.
Risk Management Can simply be defined as the various tools and processes that are put together to enable the trader to have a successful trade with minimal losses (@reminiscence01)
Also, Risk Management can simply be said to mean the various trading tools/technical strategies that are being implemented into crypto trading by and experience trader to hence reduce the rate of losses and hence maximize profit, which is the major aim for trading.
In addition, risk management is simply the method of identification, inspection, and endorsement or relief of uncertainty in investment verdicts in trading crypto assets/tokens.
Risk Management is something that is present in all situations related to money/finance. Hence, for trading crypto assets, it comes to play when a trader plans to buy an asset with the intention of selling it on a letter run. With the right risk management knowledge and techniques, this small act of trading can result to huge profit maximization for the trader but with the wrong risk management strategy in place, there will be high amount of loss for the trader which Is not good for business.
IMPORTANCE OF RISK MANAGEMENTHaving said so much on Risk management, it simply shows there are lots of importance good Risk Management technique does for a crypto trader.
This section simply entails details on various ways Risk Management is important to trading crypto assets.
One of such importance of Risk Management is simply the ability to empower the trading exercise with the appropriate tools, techniques inclusive, the ability to identify & also handle possible risks present in a trade.
Also, with the right Risk Management/Managerial skill set, techniques, strategies, tools, etc. This simply empower and serve as a basis upon which good decisions are made/ empowers the trader with good decision-making ability.
Furthermore, with the right risk management techniques in place it simply enables the trader to identify risks of higher priority to be dealt with, taking effect immediately this risk is being identified.
Good risk management techniques not only identify and eliminate the presence of barriers in the trading market, but also help maximize profit for the crypto trader.
Progressive Risk Management simply aid the smooth running of crypto trading and hence makes it less tedious with lesser barriers to deal with.
In a nutshell, it is important to know that trading the crypto market encompasses of various forms of risks which endangers the growth & also survival of trade, to avoid this it is therefore important to simply known the various basis and principles of risk management with ways on how there can be used to reduce/combat the effects of risk in any trade performed.
Explain the following Risk Management tools and give an illustrative example of each of them.
a) 1% Rule.
b) Risk-reward ratio.
c) Stop-loss and take profit.
Having being able to give an understanding on what Risk Management is and how important it in crypto trading in the above section.
It is on this note I would like to say that in this section, I will therefore be answering the question which have to do with the various Risk Management tools which includes;
- 1% Rule.
- Risk-reward ratio.
- Stop-loss and take profit.
Therefore, detail discussion of this risk management tools are hence in the subsequent paragraphs below.
1% Rule
The 1% Rule is mostly considered as Risk-per-Trade.
Furthermore, a more concrete definition of the 1% Rule is said to mean the maximum amount of risk a trader simply allow to take/tolerate in a single trading exercise. Thin simply means that under the 1% Rule, a trader is simply allowed to risk just/up to 1% from their trading account.
The 1% Rule simply give traders who trade by the guidelines of this rule the leverage of saving their trading capital and allow them the opportunity of trading for a long period of time without exhausting their trading capital and hence maximize profit.
For more clarity, an illustration is set below.
Example:
****Since the 1% Rule states that a trader cannot loose more than 1% of his/her account value on a single trade, Hence. Assuming as a start-up trader/investor, and you have $40,000 capital in your trading account with the intention to invest/trade on BTC.****
NOTE: The 1% rule never say a trader can buy only 2 of this crypto asset. This is done just for clarity purpose.
Therefore, you are to buy the crypto token with just $200 from your trading account.
Recall that:1% is equivalent to 0.01 (I e:1/100)
Therefore, 40,000*0.01=400
But, 400/200 (buying price of the crypto asset).=2.
Hence, the 1% rule says that the market position should be closed once the loss exceeds $400.
Risk Reward Position
This been the 2nd Risk Management tool simply holds that a trader should know where to place the stop loss and take profit positions. Generally, it entails knowing to positions of your stop loss and take profit in a trading market (@remeniscence01).
In the Risk Reward Position, the 1:2 ratio is being considered to be more appropriate in order to limit the loss rate present in a trade market. And also hold that the profit target should be doubled over that stop loss target. To illustrate this, an example is given below.
Example:
****Assuming while performing a trade, a trader is willing to loose $50 on a position (stop loss), hence it therefore means that the profit target will be $100 (take-profit). This simply shows that the profit doubles the loss postulated by the trader. So with the right implementation of this risk management tool, it will therefore save a trader from over trading and help them make good trading decisions.****
Take Profit & Stop Loss
This simply refers to the two Distinct ways of existing and entering a trade/ position automatically. The take profit stands in as a position that automatically exist the trade order once the market is in the trader's favour and has reach the predicted level/price set by the traders
WHILE
The stop loss stands as a position that automatically exist in the trade order when the market is against the prediction of the trader. More importantly, it is important for a trader to set his/her stop loss in accordance to the amount of money he/she is willing to risk in a certain trade.
Example: Considering the first example in this section, which sates:
[Assuming as a start up trader/investor and you have $40,000 capital in your trading account with the intention to invest/trade on BTC:
Therefore, you are to buy the crypto token with just $200 from your trading account. **Recall that:1% is equivalent to 0.01 (I e:1/100)**
Therefore, 40,000*0.01=400 But, 400/200 (buying price of the crypto asset).=2. Hence, the 1% rule says that the market position should be closed once the loss exceeds $400.]
From here, to get the position where the stop loss can be placed in accordance to the amount being risked: Investing a 10% from the free capital on BTC, this simply results to $4000. Then 20 of BTC were bought at the rate of $200 each. At this rate, if the price reduces by $2 which signifies -1%. This shows the trader have lost $40 from the 20 BTC bought.
This indicates that the stop loss will be 1040=400 I.e: 400/20=10. Therefore: $2 (rate at which the price dropped)10 =$20 from the recent price. This shows: $200-$20=$180. According to the 1% Rule, the trader have loss $400 of the value in his trading account, which represents 1%. Hence, the stop loss should be placed at $180**
Open a demo account with $100 and place two demo trades on the following (Original Screenshots on Crypto pair required).a) Trend Reversal using Market Structure.b) Trend Continuation using Market Structure.TREND REVERSAL USING MARKET STRUCTURE
With the background knowledge gotten from the previous classes on how to make effective trade decisions with market structure, apply a little of this knowledge to this section, which is about trade criteria alongside the requirements on understanding and being able to set up trade positions using market structure.
Buy Entry:
Entry Criteria.
In order to set up an entry position, the follow points must adhere to for a perfect entry position.
The first thing to be done is to first observe the market structure and have knowledge of what trend is currently at that time dominated the market.
After that, you will have to wait to make sure that the maker price had failed to create a new low, and then you will have to wait for a reversal in the market price to break the previous high which then confirms the break in the market structure of that traded asset.
The next thing to be done after the break in the market structure had been initiated, it will be wise to then wait for the price of the asset to fall back and retest the broken high which then forms the support line.
Once the above listed steps are all followed, A buy trade should then be executed to follow up of the bullish candlestick as shown in the chart below.
[screenshot taken from tradingview]
Exist Criteria
The exist, criteria have to do with stop loss.
The stop loss is simply going to be a little below the support line.
The Trade target/take profit will be set a little above the nearest resistance with the calculated Risk Reward Ratio of 1:2.
[screenshot taken from tradingview]
Sell Setup
For a sell set up it is similar to the buy set up but with a different position.
What a trader should do is to make sure that the price of the traded token fail to create a new high.
Then you will have to wait for the price of the asset to reverse back breaking the previous low which confirms the break in market structure
The trader have to wait for sometime to come back after the break in the market structure to retest the broken low, which will hence form a resistance.
Once the retest it has been done, a sell trade is executed. This is shown in the price chart of BTC/USD crypto asset.
[screenshot taken from tradingview]
Exit Criteria
This which is a part of trading that have to do with how to leave a trade have to do with the part which is the stop loss and take profit.
Haven gotten the already found resistance, the stop loss for the trade is set a little above the resistance level.
A take profit is being set at the nearest support line at a Risk Reward Ratio of 1:2.
[screenshot taken from tradingview]
TRADE CRITERIA FOR TREND CONTINUATION USING MARKET STRUCTURE
Trend continuation here simply have to do with the continual trend of a token I'm the same direction over a period of time.
To set up a trade using trend continuation, the following conditions must be met.
The first thing a trader should know is the trend dominating the market. Whether it is an uptrend or downtrend.
Considering that I made use of a downtrend: I look for the point in the price chart of BTC/USD where the price retrace and form a high low point than the previously formed high. Then take a sell trade as the price of the traded asset reversed backward with a bearish engulfing candlestick.
The stop loss was placed above the high low point with a ratio of 1:2.
This is shown in the charts below.
[screenshot taken from tradingview]
CONCLUSIONHaving a business set up without the proper Risk Management strategies and personnel to help see to it that all the possible risks are being identified and rusticated with effect.
With the proper risk management technique and strategies put in place which is being executed in the trading market of a crypto asset will serve as a guide to making good and concrete, decisions and help eliminate any emotional trauma that may occur on the trading process.
In a nutshell, this lesson has been able to tell us the meaning of Risk Management, good importance of Risk Management also Rules of Risk management and some examples with a crypto chart to help illustrate how to trade with market break structure.
All thanks to prof. @reminiscence01 for this wonderful lesson.
Best regards.
CC:@reminiscence01
CC:@steemitblog
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