Steemit Crypto Academy Season 3 - Week 8 || Risk Management in Trading by @yohan2on
"The biggest risk is not taking any risk."
Mark Zuckerberg
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Steemit Crypto Academy Season 3 Week 8 || Risk Management in Trading by @yohan2on
Not so long ago, risk was a four-letter word that was considered taboo among people, particularly business leaders and traders; in short, something to be avoided at all costs.
Today, risk is considered part of the job, especially in this changing world where we face new challenges on a daily basis, so ducking it is not an option, on the contrary, we must have the tools to manage it and put it to work in our favor.
In this article we will address the issues related to risk management through limit orders, which are basic concepts for people who want to start in the world of trading, and in this way have clear goals on when to take profits in a trade.
What is the limit of loss that can be borne for each operation and what is it? These concepts are usually available in the exchange interface to be able to trade, so we will therefore begin by defining the basic terminologies and finally show an example of how these concepts can be used in the Binance exchange.
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Trading Terminologies
Basically we will talk about limit orders which are defined as an order that you place in an order register with a specific or higher limit price defined by the trader. Then the transaction will only be executed if the market price reaches the limit price.
Therefore, limit orders can be used to buy at a lower price or to sell at a price higher than the current market price.
✅ Buy Stop and Sell Stop
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Let's start by defining the terms of Buy Stop and Sell Stop. It is known as Buy Stop when an order executes the purchase of an asset when it reaches a price higher than the current one, that is, the purchase is executed at the price equal to or greater than that indicated in the order, this price is known as "Ask" . It is commonly regarded as a tool used by traders to protect against potentially unlimited losses from an discovered short position. It is buying above a price or putting a stop loss on a sale.
Now when the price of the asset is expected to continue falling, that is, with a strong downtrend. The Sell Stop is the sell order that is executed at the “Bid” price, which is when it is lower than the one indicated on the order. Generally, traders by using the Sell Stop order, can limit a loss or protect the profit generated by a share that they own. It is selling below a price or putting a stop loss on a purchase.
✅ Buy Limit and Sell Limit
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Knowing the terms of the stop orders, we are going to define the limit orders. Defining the price of an asset as “Ask”, the purchase will be made when this price is equal to or lower than that indicated in the order, this is known as Buy Limit. That is, with the buy limit order we have the asset be bought when its price falls to the fixed limit price, this low assuming that after that point the asset price will begin to rise. It is to buy at an exact price below the current price or to close a sale at a defined price.
On the other hand, the Stop Loss indicates that the asset must be sold at the “Bid” price equal to or greater than that indicated in the order. They are used when it is suspected that the asset, after reaching the order price, will begin to decline. In short, when you want to sell at an exact price above the current price or to close a purchase at a defined price.
✅ Trailing Stop Loss
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Being a variation on the famous stop loss orders, there is the Trailing Stop, which is responsible for protecting part of the profits in a winning trade and will only move in the direction of the trade dragging all the accumulated profits. It is a way of stopping the operation before making losses and seeking to be in the operation for as long as possible.
To use the Trailing Stop, it is necessary to consider and take into account the quotation and the direction of the asset price, the technical reasons based on the analysis carried out on possible price variations, and finally considering the volatility using technical indicators. The Trailing Stop indicator will paralyze when the trend turns around and begins to decline and begins to generate losses, in this way, without a doubt the trailing stop will depend on the direction of the price and will help us to stay in the market but help to have greater control over the risk of losing profits and starting to make losses.
✅ Margin Call
The term Margin Call, is used to describe the requirement made by the broker or dealer to the trader to add new funds in order to meet the maintenance margin necessary to cover his positions in the market.
This is a situation that occurs in markets where margin trading is used, that is, in those markets where leverage is used, which is the proportion of equity capital and credit capital that make up the total capital used in an investment or any other financial operation.
The Margin Call occurs when the free margin in the account falls below the minimum margin required by the broker to cover the trader's open positions. When it occurs, the trader has to increase the margin in his account, which he can do by adding additional funds or by closing positions. Generally, it is the broker's own system that automatically performs the Margin Call when the free margin falls below the minimum required levels.
Risk Management
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Risk management or control seeks to evaluate and react to risks, although it is difficult to maintain a plan or a completely precise projection in the face of risks, the reaction time and actions to be taken are also important, this will allow us in a Future improve skills as a trader, since in financial markets, this is a completely crucial issue.
In financial risks, investors have to manage depending on the asset which they want to invest: cryptocurrencies, real estate, Forex, stocks in the stock market, among others, where each area the analysis, variables, conditions, context that lead to the evaluation have its particular variations.
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Commonly, the general public would think about market risk, but there are also other types of financial risks such as liquidity, credit, systemic risks, among others. For example, liquidity risk is when you buy a certain amount of an asset, and then in the future you want to sell it, however, as the market has no liquidity, that is, few purchase options for your assets, you will probably have to sell the assets. assets at a price below, taking losses. Another example is the systemic risk is related to the possibility that a certain event causes a negative effect on a certain market or industry, for example this year with the announcement of China wanting to stop the use of cryptocurrencies, it managed to influence the price of the Bitcoin will go down.
Finally, I will show some strategies to carry out risk management when entering the cryptocurrency market. For this we will buy an amount of Cardano (ADA) which at the time of writing this article has around -6% compared to the last 26 hours, going down from $ 2.15 to $ 1.95 at the moment. We will buy the ADAs on the Binance exchange. Then the trading will be based on using the stablecoin Tether (USDT) to buy Cardano (ADA).
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We can see that at the time of writing this post, Cardano is having a good amount of volume and about to break the 7-day moving average, at this time we decided to enter the market using the following strategy: We buy $ 10 in ADA at market price (approximately $ 1.97), but we also placed a buy order at $ 1,945, assuming ADA has a rejection and goes down again, thus making a better buy. This can be seen in the following graph on the horizontal take profit line. This is what is known as Buy Limit.
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However, we will also place a sell order, in this case a stop loss, for the first $ 10 that we invest at $ 1.96. The price could have a lateralization, so placing an order with a difference of 1% or 2% is not as feasible in volatile markets the sell order could be executed and then start to rise due to the lateralization.
Therefore, considering the Fibonacci regression or retracement when breaking between $ 1.90, it could have a strong fall targeting $ 1.80. So we are going to consider $ 1.91 as an exit point, then when the price is at $ 1.91, an order will be executed for the value of $ 1.92 which will be our value.
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In this way we can create our stop loss sell order, and as shown in the second image above, we have the horizontal line that indicates our sell order. At the time of performing these actions it was night, and since I probably went to bed to sleep, I will be able to sleep peacefully knowing that in the worst case tomorrow, I only had a loss but not so great if I had not placed my sell order, or I could Dawn with an uptrend having very good profits, in this case, I would consider analyzing to add a trailing stop loss
Conclusions
Risk is defined as the probability of a setback or threat becoming a disaster and the possible consequences of its occurrence.
Risk Management is a concept that has been gaining popularity in recent times, and it is nothing more than the set of techniques and tools that allow to evaluate the potential losses of a decision and to take the necessary measures to minimize its adverse effects.
The vast majority of exchange platforms offer their users various tools to minimize losses when placing orders to buy or sell crypto-assets.
Within trading it is essential to know the terminology commonly used, in order to fully understand its meaning and be able to operate more comfortably.
This is my Homework Post for Steemit Crypto Academy Season 3 Week 8 || Risk Management in Trading by Professor @yohan2on
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Season 3 | intermediate course class week 8
You have taken all the charts through a source and put them in homework. But it is important that you check the buy limit and sell limit on the current situation on the chart.
You should specify the chart from the tradingview site,exchange or any other chart site that you feel easy to use itself so that your homework looks unique.
You have described the topic of risk management in one paragraph, it would be better if you highlight and explain the important parts, this way the presentation of HomeWork would look better.
thank you very much for taking interest in this class,