Steemit Crypto Academy | Season 3 week 8 -Risk Management in Trading

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Define the following Trading terminologies;

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

Definition of Buy Stop

Buy stop is define as and order that is already program in an exchange/trading platform to instruct a trader to buy a crypto once the price reaches a certain/specified price. In a nutshell, buy stop is simply and order that is set at a stop price which is above the market price currently. Traders make use of the buy stop to minimize losses that may incurrs in other to secure a profit on the asset which has already been sold out.

As a trader,once you have set your order to buy stop, as soon as the price reach the level, your buy stop will then be execute which is known as a market order or limit order.

Sell stop

Sell stop is define as an order that is placed below that of the market price that is currently on sell. In a nutshell, is a order to sell a cypto once the price reaches a specified price. The same way the buy stop is used to limit losses or protect profit is exactly what the stop is used for. Now let's take a look at the screenshot below.

From the above screenshot, the price of BTC/USDT current market price is $46838.59000 and I want to sell it when the price become lows.What I will do is to enter sell stop at a price that is below the market price of which here is entered $46126.621132. Once I do this, the sell stop will be executed once BTC/USDT reaches $46126.621132. This example is also apply to buy stop.

Buy limit

Buy limit, is define as an order to buy a coin at or below a certain price known as the current market price, which give traders the chance to be in charge of how much they are to pay. For instance,as a trader/investor you want to buy BTC/USDT for just $20. What you have to do is to set and submit a buy limit for $20 for your oder to be execute once the price of Steem is from $20 below.

Sell limit

Sell limit can be define as an order that is placed by a trader/investor to sell a coin above the current market price. When a sell limit is placed the order can only be execute if the price reach the level.

For example, looking at the screenshot above BTC/USDT is trading at $46838.59000 and I want the price to reaches $47158.993964. What I will do is to create a sell limit so that once the price get to $47158.993964 or higher above my trade will become short trade an my order will be execute.

Trailing stop loss

In a simple understanding, trailing stop loss is define as the type of order that assist in managing the risk of at which a trade is supposed to fall into that is closed once the price go higher above by specifying the point. This is essential to investor as it help them to ensure that their losses are limited.Why do I say this? Okay I said this because trailing stops helps you to lock your profits while allowing your trade to be open until your trailing stop level is reach.

Margin call

Margin call is define as the type of call that happens when the margin account of a trader falls below on funds, due to loses in trade. Margin call usually involves the assets that are bought using borrowed fund which then become the margin call bringing together the trader fund and the borrowed fund together.

Practically demonstrate your understanding of Risk management in Trading.

Risk management is simply the measures that is put into consideration by a trader when performing trading to assist in safeguarding his losses in other not to risk his fund. In other way round, risk management is the measures that a trader has put into observation when carrying out trade to assist in keeping losses in other not to totally devalue by providing a suitable risk or reward ratio that will control profit.

As a beginner or expert trader it's advisable for we to know the important of risk management when trading or investing our funds,as trading with high risk is known to offers higher reward. At this point let's focus on leveraged products before I continue. As I early say, trading is very risky, but the higher the risk, the higher the reward and leverage products is what am going to demonstrate this. Leverage simply means,a trader don't invest all the amount that is needed to open position.Instead the trader invest only a percentage amount known as a margin.

Let's say that for example, Binance exchange has a margin rate of 20%, an a trader only invest 20% of the amount that is needed for the trade position to be open. Whatever losses that the trade will make will be base on the position size as well the profits. But if the trader make use of a small deposit, the trader will have the opportunity to access bigger losses or profits. The reasons for this is to let's know that it is very important for any trader be it beginner or expert traders to keep control of any losses in other not to quickly lose his/her account.

Risk management, strategy and psychology are the three best guide to trading. As a trader who lack proper risk management will also be losing his/her fund. But in a case where such traders understand risk management and its tools,such traders can control their losses.

Risk management tools

Trade size, risk reward ratio and stop loss & take profit are the key areas of risk management that I will discussed about. Let's us start by looking at take profit which is what every traders is looking for.

Stop loss & Take Profit

Step loss is simply an order that make trade to be closed when market price goes above the level that was selected to buy an asset. Let's take a quick look at the demonstration for a better understanding on stop loss & take profit.

For instance, a trader/investor open a buy trade on BTC/USDT at a price of $520. The trader/investor choose to put a stop losses at a price of $510. Now in a situation where BTC/USDT price fall to $510 then it will be close out by the stop loss since the price has fall below $510 of the stop loss.

The take profit close trade once profit has been make. The structure of the market will enable you to determine when profit is to be taking.

Trade size

This has to do with how your trade is being place based on the amount that is in your account. For instance, an investor who have $50 worth of Steem in his account and open a position at $55 when the required margin is $25. This mean that the trader is only giving out $25 out of the $50 in his account as margin because he want his trade to grow.

Risk reward ratio

The risk reward ratio is simply the amount of fund that a trader is willing to risk out in other to get some amount of profits. Let say for instance,a trader invest $20 dollars and he is willing to risk out $10 as risk reward ratio. This simply means that the trader since he has invest $10, his risk and profit would equally be $10 dollars. Expert traders usually prefer going for risk reward that are below 1:2,1:3,1:4,1:5. This ratio help expert to minimize overtrading that will totally lead to loss of funds.

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

Based on my understanding on of Risk management, I make make use of litforex to demonstrate risk management where I use a two moving average line in the chart.

The above screenshot is a chart of BTC/USDT pair. Looking at the chart I have indicates risk management tools with their amount. Take profit 46802.27096, Entry price 46046.867195, Stop loss 44901.504024 . The golden cross, is the point where the moving average of blue and red lines cross each other (MA 200 red & MA 50 blue line). As stated above when concerning take profit, I make mention that take profit close trade as soon as profit has been make,which is determine by the market structure. For that reason I decided to calculate my risk and profit using the information on the market structure that is showing in the charts using the following formula:

Calculation of Risk:

Risk = Entry price minus (-) Stop loss
Where:
Entry price: 46046.867195
Stop loss: 44901.504024
Take profit: 46802.27096

46046.867195 - 44901.504024 = 1145.363171 Risk

Calculation of profits
Profit = Take profit minus (-) Entry price
46802.27096 - 46046.867195 = 755.403765

calculation of Risk Reward Ratio
Risk Reward Ratio = Risk ÷ Profit.

1145.363171 ÷ 755.403765 = 1.5

Anything below 1:5 is a prefer risk reward.

Thank you fur your time here......

Best Regards;

@yohan2on