Crypto Academy Season 3 Week 8 Homework Post Risk Management in Trading for (@yohan2on)

Hello mates. We are finally in the last week of this season's Crypto Academy and I must say it has been a wonderful experience. Thanks to all the professors for the good work done. This is my submission post for @yohan2on lecture on Risk Management.

1. Define the following Trading terminologies;
Buy stop
Sell stop
Buy limit
Sell limit
Trailing stop loss
Margin call

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Buy Stop

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A buy stop order is one that is to execute a purchase order once the price of the asset reaches a pre-specified value usually above the current market price. In simple language, this is a point above the current market price the trader wants to make a purchase of the underlying asset.

The Buy stop order is a risk management tool and strategy used by the traders to make profits from an anticipated bullish trend. The logic behind this strategy is that because the buy stop was set above the current price and usually a little over the resistance area, if the price should go up and hit the buy stop level, they anticipate a continuous uptrend and they can make profits.

Below is an illustration of a buy stop order on a BTC/USDT chart on TradingView

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Sell Stop

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A sell stop order is one that is to execute a sale order once the price of the asset reaches a pre-specified value usually below the current market price and support area. In simple language, this is a point below the current market price the trader wants to sell off the asset. The sell stop is usually placed below the support area because once price goes beyond the support area, traders expect a continuous downtrend and are likely to seel off the asset to cut further losses.

Below is an illustration of a sell stop order on a BTC/USDT chart on TradingView

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Buy limit

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Buy limit is a buy order traders place below the current market for the purchase of the asset once price declines and hit the buy limit value set by the trader. Indirectly, the trader attempts to determine the price he wants to buy the asset so until the price hits the buy limit, the asset will not be bought. Traders usually anticipate a bearish trend reversal after the buy limit is executed i.e they expect the price of the asset to appreciate after the buy limit order is executed and the asset has been bought.

Example: The current market price of Asset POB is $20 and Buy limit order set by the trader is $15. This is to mean that the trader wants to wait for the current price ($20) to decline and reach $15 before the buy order should be executed.

Below is an illustration of a buy limit order on a BTC/USDT chart on TradingView

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Sell limit

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Similar to the Buy limit, here traders set a limit above the current market price where they want to sell off the asset. The sell limit order is placed above the current market price and this sale order will only be executed when the price of the asset has appreciated and has hit the sale limit set by the trader. This is indirectly the trader determining the price he wants to sell the asset in the future.

Example: The current market price of Asset POB is $20 and Sell limit order set by the trader is $30. Here the trader wants the price of the asset to appreciate to $30 before the sell order should be executed. This is because perhaps the trader has made enough profits and is ready to leave the market.

Below is an illustration of a sell limit order on a BTC/USDT chart on TradingView

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Trailing stop loss

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Trailing stop loss is a strategy used by traders to increase profits but reduce losses in the market. The only difference between a trainling stop loss and the usual stop loss is that movements in the price that favors the trader changes the stop loss in the same direction to favor the trader. For instance, an increase of the price asset from $15 to $20 will cause the trailing stop loss to increase by $5 too but when the price reduces to $12 and the stop loss was set at $10, the stop loss doesn't change. This increases the profits to be ganered by the trader whiles reducing the loss.

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Margin call

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Investors usually enter trade using their own funds or sometmes borrowed funds from the brokers they work with. After trading, investors can make huge returns or losses. When losses are made and the funds of the investor are depleted, the broker will notify the investor of the loss and demand the investor to bring in additional funds so the account reaches the minimum required to trade. This is termed as a Margin Call.

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Practically demonstrate your understanding of Risk management in Trading. Briefly talk about Risk management.

Just like every trading business carries risk, trading crypto and other assets comes with varying risks that needs to be managed. Risk manangement is very important to circumvent the losses associated with crypto trading. Some of the risks associated with trading crypto are liquidity risk, operational risk and market risk.

• Liquidity risk, is the risk associated with exchanging crypto holdings for fiat money easily.
• Operational risk is concerned with the inability of traders to trade, or go about trading activities due to challenges with the system.
• Market risk, the most important risk that need serious attention and management. This is the risk associated with the volatility of the price of the assets.

To manage the risks that comes with trading crypto, traders will have to consider a number of issues and trade cautiously. Below are some cues one can pick to manage the risks associated with crypto trading.

• Prepare yourself: When you enter the crypto world and want to trade, be prepared for the best and the worst as well because it is a very dicy game. Crypto trading has been identified to be a very lucrative and a fruitless venture as well. This is to tell you that it is a two-sided enterprise and depending on how you go about it, you can fall in any of these two groups. Decide on how much you want to invest and identify your risk profile. Get yourself ready.

• Get your tools ready: To be a successful trader and minimize risk, know what kind of assets you want to trade, equip yourself with the necessary tools like the various crypto websites for data and technical analytic websites like TradingView that will aid in understanding the market. Know and understand charts to determine current market trends and predict future trends.

• Diversify your risks: Once you are ready to start trading, remember not to put all your investment in one asset. Spread the risks accross different assets so that in an event of loss, you don't lose everything. Do deep investigations into a number of assets study their prie behavior and progress by adding them to your watchlist, make proper and in-depth fundamental and technical analysis before you make your choice to invest.

• Employ in-trade risk management tools: When you have entered trading already, you can further minimize risk by using risk management tactics like setting stop losses, buy limit and sell limit.

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

I will be doing this part of work using TradingView.

Launch the TradingView website using this link

Launch charts and choose a cryptocurrency pair. I choose BTC/USDT.

To add the Moving averages indicator, tap on Indicators denoted with fx

Use the search box and enter MA

Double tap on Moving average to add the indicator to the chart

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Edit the length of the first moving average from the default 9 to 50 (short term moving average) and change the colour to red.

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Edit the length of the second from the default 9 to 200 (long term moving average) and change the colour to green.

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This is what the chart looks like afer changing the settings.

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From the chart, we see the short term moving average (red line) trend downward and cross the long term moving average (green line). The point these lines cross is called the Death Cross and is associated with a reversal of trend from a bearish trend to a bullish one.

With this knowledge that an uptrend is expected, I place a buy stop order a little over the resistance area because I expect the price to rise and go above the resistance area.

Again, I set a sell limit order where the asset should be sold off once the price hits that value then I take my profits and leave the market as shown below

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Conclusion

To be successful traders, we should be able to understand the markets and minimize the risks we are exposed to whiles trading. We should employ various risk management tools like setting stop losses to reduce expected losses in trading.

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Thanks for readinng. I hope this helped you understand the subject proper. Thanks to @yohan2on for this lecture.