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

Hello Steemians....... I'm glad to be here again this 8th week of season 3 in the Steemit Crypto Academy. This is a post for Professor @yohan2on on Risk Management in Trading.

1- Define the following Trading terminologies;
Buy stop
Sell stop
Buy limit
Sell limit
Trailing stop loss
Margin call
(I will also expect an illustration for each of the first 4 terminologies listed above in addition to your explanation)

Buy stop

Buy stop is a buy stop order set by a trader in a market, the buy stop order is set above the current market price of a stock. When the price hits the buy stop order, the order is implemented.

For example: If an investor wants to buy a stock with a current price of $8 for $9. What the investor needs to do is to set a buy stop order of $9, once the price of the stock hits $9 the order will be executed.

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Sell stop

The stop order is used by traders to set a price at which they want to sell a stock. It is set below the current price of the market of a stock. The sell stop order execute automatically once the price drops below the market price to the price set for the sell stop order.

For example: If a trader bought a stock at the rate of $20 and the price of the stock rises to $40, the trader can set up a sell stop order of $30 in order to get a profit of $10.

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Buy limit

Buy limit order is used to set a limit price at which a trader would want to buy a particular stock. The buy limit is set below the current market price and it is executed once the market hits the limit price or lower than the limit price.
Traders uses the buy stop limit with the hope that the current price of a stock will drop due to the fact that the stock has been overbought.

For example: If Mr. Mike wants to buy 50 Steem, assuming the price of Steem is currently $10 per Steem. Mr. Mike can set a buy limit of $8, if the price drops to $8 the order will be executed.

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Sell limit

Sell limit is used by traders to place a limit price they likely wants to sell their stock that is higher than the current market price of the stock.

When a market price has been oversold, traders uses this type of market order with the believe that the market price will experience a reversal trend due to the fact that it was been oversold.

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Trailing stop loss

This type of market order is used to place a stop-loss order of a particular percentage and it helps traders to manage risk during trading.

Traders uses the trailing stop loss order to limit losses during trading. The trailing stop loss order trail in the trader's favor until it hits the trailing stop loss, then the market is forced to close so that the trader does not experience much loss.

For example; If a trader enters a trade with $200 and place a trailing stop loss order of 5%, if the market trials against the trader's trailing stop loss which is 5% loss, the trade will be triggered to closed.

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Margin call

A margin call occurs when there is a need for an investor to fund his/her margin account. This happens when the funds in the trader's account is falls below the required percentage,this required percentage is often referred to as the ‘‘maintenance margin”.

A trader runs low of maintenance margin as a result of failed trades which leads to losses.
If a trader fails to deposit funds after a margin call in order to meet up with the maintenance margin, the trader won't be able to participate in trades. The trader can also sell his/her asset inorder to meet up with the maintenance margin.

2 - Practically demonstrate your understanding of Risk management in Trading.
*Briefly talk about Risk management
*Be creative (I will expect some illustrations)
*Use a Moving averages trading strategy on any of the crypto trading charts to demonstrate your understanding of Risk management. (screenshots needed)

RISK MANAGEMENT

Risk Management is an important factor in trading that traders most a times fail to pay attention to. Risk Management helps traders to manage and cut down losses during trading. There are many risk management strategies in trading.

Trade planning

Risk Management in trading begins with a trading plan, this is achieved by carefully selecting a good trading strategy. Also choosing of a broker that will suit the kind of trading you want to go into so you don't pay more than expected for commission fee is essential in risk management.

Stop loss and Take profit

Before you enter into a trade you should be able to know the price rate of a stocks you will wish to sell in order to make profit or to limit losses.
Often times unsuccessful traders enter a trade without setting the limit at which they will want to sell in order not to experience a loss.
On the contrary, successful traders plan ahead before entering a trade, they know the price at which they'll want to sell off their stock in order to make profit or to limit losses. They are able to achieve this by setting a stop loss and take profit orders.

Risk/ Reward Ratio

This has to do with the amount a trader is willing to risk in order to a certain amount in return.
For example; If a trader enters a trade with a risk-reward ratio of 1:1, it implies that the trader is willing to risk $1 with the hope of getting $1 in return. For a risk-reward ratio of 1:5, it means that the trader is willing to risk $1 to get $5 in return and so on.

Risk ratio is based on a traders experience, the 1:1 risk-reward ratio is advisable for newbies

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

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Applying a moving average strategy, I observed that the market trend is moving downwards i.e a downstream trend. Therefore I set a buy stop order since the best time to buy a stock is when the price is in a downstream, with the hope of selling it off when the market is in upstream trend.
I selected my buy stop market order and then set my stop loss and take profit order, the stop loss order will help manage my risk if perhaps the market moves against me and the take profit will help lock my gain when the market hits the take profit order.

Conclusion

Before going into any trade, it is important to plan the kind of trade you want to venture into and have a good understanding of risk management strategies and how to apply them. Trade planing and risk management brings about successful trades which saves traders from being devastated due to losses.

Cc:-
@yohan2on