Steemit Crypto Academy | Season 3 Week 8 - Risk Management in Trading by @yohan2on.

INTRODUCTION.

Today signifies the beginning of another lovely week and of course the opportunity to gain knowledge from the steemitcrypto class as well. To start this week’s task I will be attending the lecture provided by professor @yohan2on and of then move further to answering the questions that comes afterwards.

Cryptocurrency trading is gaining more popularity by the day, there are traders making profits in large amounts on a daily basis and of course spreading the fame, but there are traders who are also making huge loss on a daily basis, the side on which each trader stands depends on the trader’s ability to understand the concept of risk management and utilize it appropriately.

Question 1- Define the following Trading terminologies:

Buy Stop: A buy stop order is entered by a trader at a point higher than the current trading price. This idea is utilized by traders/investors to limit the effect of an already existing loss or to cover up on a profit they have once sold at a price of loss.

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Sell Stop: A sell stop order is immediately triggered when the price of a token drops to the price predicted by the trader or investor. When the price of an asset falls to the predicted price, it is most likely that there is going to be a continuous drop in price but the trader/investor can act smart enough by setting his sell stop to a price where a huge drop in price will not really affect him. A sell stop order is set at a price lower than the current market price

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Buy Limit: This ideology is used by traders to ensure that they pay less for a particular asset. A buy limit order is filled for a certain token and then once the asking price becomes lower than the specified price, the order becomes filled instantly but if it happens otherwise that the asking price does not get to the point set by the trader, then the trader might miss out on the trading opportunity.

Sell Limit: A sell limit order is issued by a trader when he believes that the price of an asset will get to or rise above a desired point. If the speculation of the trader is right and there is an increase in the value of the asset beyond speculated price then it becomes a good point of entry for the trader but if it does not happen then the trader might lose out on the trading opportunity.

Trailing stop loss: It is the joy of investors to minimize loss at every cost, while using a trailing stop loss prices are usually not set at a particular point rather it is set below the market price so when there is an increase in price, the trailing stop loss increases alongside and when there is a stop to the rise in price, that automatically becomes the new point of stop loss creating no room for loss and protecting the profit of the investor as the price goes higher.

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Margin call: Losing is almost inevitable in trading, when loss happens and then a margin account goes low on funds, then there will be a need to demand for more capital from investors or investors will be advised to sell some of the owned assets, the idea of asking investors for additional funding is known as MARGIN CALL.

Question 2- Practically demonstrate your understanding of risk management in Trading.

Briefly talk about Risk Management.

Trading is a game of winning and losing, we win some and loose some just like life’s philosophy. However, the loss can be controlled if the trader can carefully pay attention to study available trading techniques and then decide to trade smartly following these techniques rather than gambling.

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Risk management techniques is usually ignored by amateur traders who simply think that trading is more about cashing out large profits, understanding the risk management associated with trading, makes it possible for strategic thinking to take place and it is the strategic thinking put in place appropriately that will enable a smooth run of trade experience and possible profit.

Plan every trade.

It is more than essential to have a planned out strategy on how to utilize the opportunities that each trade presents, it becomes more safe to win a trade when you are well prepared for the appropriate time to enter into a trade and the appropriate time to exit the trade, no when you begin to trade ensure that you play by the planed out rules and do not allow greed get the better part of you.

Stop loss and take profit.

This is a significant tool that traders use a lot which is also one of the strategies used to plan ahead for a trade, when a significant amount of profit is attained, intelligent traders understand how to easily take profit and set stop loss rather than wishing and hoping for more interest and then losing all the acquired profit and capital in the process. Trade indicators are a good way to set stop loss and examples are: Fibonacci retracement and RSI (Relative strength index).

The one percent rule.

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The one-percent rule is set by traders in order to help them avoid getting a huge amount of lose while trading. Smart traders often set the amount they want to lose to be around 1% or 2%, following this rule will efficiently help traders cut down significantly on the level of amount lost during a trade. While using the one percent rule, it means that a trader who has a trading capital of $200,000 could only possibly lose $200 on every trade and nothing more.

Question 3- Use a Moving averages trading strategy on any of the crypto trading charts to demonstrate your understanding of Risk management. (screenshots needed)

In other to answer this question, I will be using Moving Average Strategy to pick points of entry for a position. I used this to trade yesterdday for the purpose of this post and it worked out well.

Requirements

• Charts: Support and Resistance
• Indicator: 200 MA and 25 MA. (I could add other indicators for clarity but since the post request MA, I will stick to this).
• Time frame: 4 Hours, 1 hour, and 30 minutes

200 and 25 Moving Average Strategy:

While I can't lay claim to owning a strategy as a lot of people find strategies on a daily basis, I got to know this strategy by playing with charts. This chart has to do with trade risk management so I will be doing that.

200MA is for long term trend, 100MA and 50MA are for short term trends while 25MA is for short term trends. In this post, I will be using the 200 and 25 Moving Average. I picked the BTC/USDT trade yesterday. I picked the trade after a reversal from a strong support zone which was confirmed by the MA.

First, I confirmed the trend using the 4 hours chart and the 200 MA. When the 200 MA is below the chart, it is a long term uptrend and trades in the 30 minutes trade should be in the long position and when the 200 MA is above the 4 hours chart, it is a long term downtrend and trades positions in the 30 minutes chart should be short positions.

After checking the 4 hours chart, I realized that the 200 MA is below the chart which means the market is in an uptrend.

On the 1 hour chart, I checked for areas of support and resistance as well as chart parterns. In the screenshort below, I showed areas of support and resistance.

In the 30 minutes chart, I added to 25 MA which is a short term indication to check the moving average of the chart. at the point when the 25MA crosses below the 200MA, it is a short term downtrend, provided the 4 hours and 1 hour 200 MA is below the chart signifying an uptrend and a buy signal should be taken when the 25 MA crosses over the 200MA and stay above the 200MA. The buy signal should be taken at the next candlestick after a previous bullish candlestick

The point of Entry is the point where the price breaks out in reversal of the short downtrend and breaks out of the support level. Using the 200MA and 25 MA in a uptrend market, when the 25MA crosses above the 200MA, it is a buy signal. Let me show other points in the chart.

Setting Stop Loss and Take Profit Every trader have their stop loss percentage, some take 1% - 2%, this is a very good one, and this is often associated with Margin or futures traders. For me, I go with 3% to 5% or below the previous support/above the previous resistance. Also, I leverage at 3% which makes my stop loss level higher compared to traders who trade using 20% leverage. I set take profits at the resistance as these points are possible points for reversals.

• Never be emotional with the market, once a trade has gone against you, go and re-strategise.

• Leverage is a good tool for those who know how to use it. The higher the leverage, the higher you are willing to lose. Since it is not a get rich quick scheme while use high leverage.

• Trading is a serious business and not gambling, you are to take profit when needed. The market will always discount itself so never be greedy.

CONCLUSION.

It is neccessary to always consider risk management while trading because it will help in reducing loss to a significant extent. Trading without understanding the idea of risk management is subjecting yourself to huge loss.