Steemit Crypto Academy Season 5 Beginner Course - : Risk Management and Trade Criteria.

Image created by me @kenneth00 in canva

INTRODUCTION

Greetings to every one in steemit reading this post, I am here to submit this week beginners homework of the steemit crypto academy introductory post given by our creative professor @reminiscence01 and i will be answering the question for the homework on the topic "Risk Management and Trade Criteria"

1). What do you understand by "Risk Management"? What is the importance of risk management in Crypto Trading?.
2). Explain the following Risk Management tools and give an illustrative example of each of them.
a) 1% Rule.
b) Risk-reward ratio.
c) Stoploss and take profit.
3). 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.

I Have Read The Questions Now it's Time I Answer The Question

1). What do you understand by "Risk Management"? What is the importance of risk management in Crypto Trading?.

Risk according to the dictionary is the exposure to danger, meaning once you know something can harm you and you get yourself involved you are taking risk.

Well in anything we do in life now we are taking risk, risk is not only for those who put their life in harms way it is for everyone because in order to succeed in life you need to do better than the rest by taking risk because it is not everyone who can take risks that is why Athletes, doctors, journalists and security personnel always gets paid higher than the rest because they take risks when they do what they do.

In trading of crypto there is risk too, there is risk of loosing your money when your trade fails that is why it is wise to always use the money you can spend to trade because trading is very risky especially in cryptocurrency.

Which my way of risk management because you are not using all your money but the money you can afford to loose so that if you loose it you can easily move on and trade another day.

In order to be a successful trader you have to combine a trading strategy that works for you and the risk management that works for you, this cannot make you win every trade but it will increase your wins and reduce your losses which will put some profit in your pocket, the reason many people don't succeed in trading is because they don't have a trading strategy or a risk management and they are also greedy that is why they loose everything.

Risk Management

What is Risk Management:

Firstly what is Risk, well as i said before risk according to the dictionary is a situation involving exposure to danger.

While Management according to the dictionary is the process of controlling things or people.

From these two definitions, Risk Management in trading crypto can define the processes and methods taken by a trader before an order is taken in the market. To reduce losses and increase profits. It is simply referred to as measures adopted by a trader to reduce losses when he/she steps trade an asset in the markets.

When someone places a sell or a buy order which is a short or a long order in the crypto market there is a very big chance that He/she might loss, losses that might wipe all the money out of your trading account, how he/she must prevent this from happening is simply known as RISK MANAGEMENT.

Risk management has proven to be one of the most important tools used by traders to manage their their trading account, it has to be given special attention because without it in a trade there is always going to be a high chance of loosing of capital.

Importance of risk management in crypto trading

From all i have explained above the it is quite clear that risk management is important in crypto trading. Risk management gives traders what to fall back to when anything goes wrong when they are trading. It gives traders more confidence, finesse, insurance and skills to use the price chart to their favor.

I am going to be listing and explaining some importance of risk management in trading.

• It boosts the confidence of any trader

When someone is about to take any action in the market, it is smart to be confident and sure of what trade they are about to take, whenever risk management is used by a trader it gives him alot of assurance that his/her trade is secured, and there is a greater chance of making profit, even when the trade goes against our prediction and takes a wrong turn because the looses will be low.

• It Promotes consistency in application of strategies:
  Risk management as explained above gives safety in a trade, it helps a trader choose the best trading setup, it gives trader confidence in his or her strategies and this allows him or her to apply the strategies consistently without any doubt in mind when he is on a losing streak.

• Risk Management helps a trader to control emotions:
  Majority of crypto traders are human beings with emotions and why i say majority because there are bots that are called trading bots, it is very natural for a person to be greedy and push harder whenever he or she fails, without risk management, traders can always be deceived by their emotions.

• It helps to minimize losses
  As we all know the crypto market is a very volatile and manipulated market, prices fluctuate, move up and down, it is therefore very important to have a proper plan of risk management, this is to help a crypto trader reduce his or her losses and increase his profits when trading in the market.

2).Explain the following Risk Management tools and give an illustrative example of each of them.

a) 1% Rule.
b) Risk-reward ratio.
c) Stoploss and take profit.

It is always good to know that to know that the crypto market can be very flexible which makes it very risky place to be investing money, investing in the crypto market without a plan is dumb because it could get you liquidated easily that is why you need risk management and in this section i will be listing and explaining the risk management tools.

I will be explaining some risk management tools and they are:

• 1% rule
• Risk reward ratio
• profit and stoploss

1%

This tool of risk management is used by traders in the market with the goal of reducing their losses and increasing their profit, it refers to a situation whereby a trader only risks 1% of the his/her trading capital. That means he or she is investing into the crypto market with just only 1% percent of whatever amount of money he/she has as trading capital.

This tool is very good because it doesn't get liquidated if the traders trade goes against he/her plan.

Example: Let me say i have $200 as my trading capital and i want to use 1% which is (1/100×200)=2, that means i will be trading with only $2 so even though i loose that $20 i will still have $198 so i can keep trading so as to recover my money.

Risk reward ratio
If you are a trader and you don't know what a risk to reward ratio is that means either you are not a good trader or an unsuccessful trader.

Risk reward ratio just means the difference between the amount of money invested in a trade and the amount of profit expected by the trader if the trade goes according to plan.

Yes this risk management tool is very important for those who loves to trade with high leverage, as any good trader should always have a target when he/she trade in the market. Some traders don't this rule at all that is why to loose their capital.

If I want to use this tool in a trade that i know has a risk ratio to 1:2 that is risk=1 and reward=2 not risk=2 and reward=1 you are definitely going to loose you money.

Example: I am trading $3 and i am using ×2 leverage then i must find a good trade that the risk=1 and so that my reward can be 3×2=6, so i will enter that trade expecting $6 as my profit.

Stop-loss & Take profit

By reading the name you will know that it basically mean stop loosing and taking profit because that is what it means but i am going to be explaining them in more details.

Stop-loss: this is a level to stop or close a trade that is not going as planned at a particular level.

Take profit: this is a level to close a trade this going as plan and it is in profit, this tool is used by trader who want to maximize their profit because the tool take them out of a trade in profit as soon as the price of the asset reaches the level that the trader expect a price reversal.

It is good for any trader to have use this tool so as to reduce unwanted losses when the price of the asset goes against their trade or maximize their profit when the asset price goes according to plan.

To carry out use this tool a good trader uses indicators in the price chart so that this tool will actually work and the indicators are Support and resistance line

This indicators are how the trader will know were top enter a trade and put a stop loss and a take profit tool, a good trader know that if the price of an asset is approaching a resistance or support level most of the time the price reverse, so if i was going to short the price of an asset i will wait until the price of that asset approach a resistance level then i enter the short trade with the stop loss and then i will enter the take profit tool where there is a support of that asset price, the plan for this trade is when the trade reaches it's resistance level it will start to go down but it if continues to go up i will be exited of of that trade with minimum loss but if the trade goes a plan and fall to the support level my take profit will exit me out of the trade with profit.

3). 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

Entry Criteria

• From the above screenshot we can see that it is a Btc/usd chart configured on an hour time frame. From the picture we can see that price continues to produce lower lows which indicates that the market is in a bearish trend.

• We can also observe that price failed to create a new low, bullish pattern was formed given a W pattern, indicating that a breakout might occur to the upside , and price might take a new direction, so i entered a long at $47499 because the price target was $50,000

Exit Criteria

• Now let's get to the stop loss order, I entered my stop loss order above the level i entered the trade incase there is a manipulation after it hits $50,000. At $47900.91. And let's not forget that if price moves down and touches the stop-loss point, the trade would be exited.

• And obviously the take profit was set to meet the nearest resistance level which is at 49,000, having a 1:2 risk to reward ratio.

My demo trading account balance as at the moment I opened was at $1000.

By Applying the 1% rule as you can see below

In this trade I used the 1% tool
1/100×$1000= $100

• Trend Continuation using Market Structure.

EntryCriteria
Before I placed my sell entry, I had to carefully observe the price movements, price kept on breaking out but there was no volume then i realize it is going to reverse once it hit a resistance but i was not sure that is why i used the 1% rule, I carefully observed and placed a sell entry at( $49,112.87).

Exit criteria

• according to my screenshot above it can be seen that the STOP LOSS level i placed slightly at the support level(49,100), the trade would be invalid price of bitcoin didn't care about volume and kept pumping towards $50000

• Then the take profit level was placed at the place were the bitcoin started to pump from which is at the 47,499 level but as you can see a very red engulfing candle kept going down to $46,000 so i made profit from that trade

Before i started this short trade i had $1100 in my demo account

below is the calculation of applying the 1% rule

I risked $100 in this trade 1/100×1100=100
1100-100=1000

That means I would loss 100 out of my 1100 if my trade takes a wrong turn but it didn't so that means the money in my demo account is 1200.

Conclusion

In life in everything we do there is going to be risk and in trading risk is high so in order to reduce those risk a trader must use risk management.

I want to conclude this post by appreciating the professor who found time to write this lecture @reminiscence01 for this great lecture on Risk management and its importance. I had an experience while writing the homework.