Crypto Academy / Season 3 / Week 8 - Homework Post for [@yohan2on]: Risk Management in Trading / by @preye2

Hello,

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Risk Management is no doubt a very important aspect in trading, as the goal of risk management is to focus on anticipating what might not go as planned, as well as implementing actions to reduce uncertainty to the acceptable level. Risk could come with great rewards when managed properly, so below I will be writing extensively on Risk Management.

NUMBER 1

Definitions of the following trading terminologies and illustrations using my MetaTrader 5 demo account

• Buy Stop: This can simply be referred to as buying above the current price in a fluctuating bullish market. It is really useful when it comes to breakouts, because it can help a trader to buy assets above the current price as long as the trader places his buy-stop somewhere above the current price. When price crosses above it's current trend, the buy order will be activated.

Below is an illustration of Buy Stop using a DSH/USD pair with a 5 minutes timeframe

As you can see in the screenshot above, the current price of the asset is around 221.508, and I want to buy above the current price. So I set the buy stop at 225.900, as well as my stop loss and take profit at 221.940 and 225.977 respectively. My buy order will be activated when the price gets to 224.400.

• Sell Stop: This is a pending order that is opposite the buy-stop, because it refers to selling below current price in a fluctuating bearish momentum. When price crosses below it's current trend, the sell order will be activated.

Below is an illustration of Sell Stop using a EUR/USD pair with a 5 minutes timeframe

As you can see in the screenshot above, the current price of the asset is around 1.16844, and I want to sell below the current price. So I set the Sell stop at 1.16760, as well as my stop loss and take profit at 1.16846 and 1.16740 respectively. My sell order will be activated when the price gets to 1.16760.

• Buy Limit: This is used for breakout strategies to place buy orders below the current price during a fluctuating bullish momentum. This order is activated when price hits the position where the trader wishes to it, i.e somewhere below the current price of a bullish momentum.

Below is an illustration of Buy Limit using a BTC/USD pair with a 5 minutes timeframe

As you can see in the screenshot above, the current price of the asset is around 46667.95, and I want to set my Buy Limit, somewhere below the current price so that even when the market doesn't continue with the same current momentum, I would be able to execute my buy order.
So I set the Buy Limit at 46283.500, as well as my stop loss and take profit at 45960.00 and 47090.83 respectively. My buy order will be activated when the price gets to 46283.500.

• Sell Limit: This is equally a breakout strategy used to place sell orders above the current price during a fluctuating bearish momentum. This is a sell order that is executed when the price hits a set position somewhere above the current price of a bearish momentum.

Below is an illustration of Sell Limit using a ETH/USD pair with a 5 minutes timeframe

As you can see in the screenshot above, the current price of the asset is around 3220.29, and I want to set my Sell Limit, somewhere above the current price so that even when the market doesn't continue with the same current momentum, I would be able to execute my sell order.
So I set the Sell Limit at 3233.00, as well as my stop loss and take profit at 3290.00 and 3177.00 respectively. My sell order will be activated when the price gets to 3233.00.

• Trailing Stop Loss:
  This is another risk management technique used by traders to place stop losses orders at a desired percentage distance below current market price. The position will remain open as long as the price continues to move in the right direction, which gives a trader the possibility of making good profits.
  The trailing stop loss order helps a trader to lock-in his profit in an open trade, and will be executed when the price hits the trailing stop level.

• Margin Call: This refers to the obligation (security) required by a trader to deposit with their broker in order to get the margin account back to it least requirement.
  This usually happens when the trader losses huge percent of the amount being held as collateral.

This margin call could come to a trader in the form of a notification alert on the website of his/her broker, when the formula below occurs:
The Value of the Account = (The margin loan) / (1 - % of the maintenance margin).

NUMBER 2

My Understanding on Risk Management in Trading

When it comes to crypto trading, it's not only about profits but also about risk, so to be on a safer side, you need to set out risk management technique on your trades.
Risk Management refers to the ability to predict and control possible losses in a given trade. Failure to place a risk management strategy in trading, will definitely amount to loss of assets.

Below are the fundamental principles of risk management in crypto trading

• Diversification of the risk: Don't invest all your entire deposit into one cryptocurrency, because if you eventually loss 60% in that single crypto, you have successfully lost more than half your assets which is very bad. Instead invest on different coins with different volumes and market caps.
• Only open a position with not more than 2% of your entire deposit, and the profit to loss ratio should be 3:1.
• Use the right strategy and do not loss large amount of your deposit by applying stop loss and take profit.
  

Stop Loss: This is an instruction given to the trade to close when a certain price loss level is reached.

Take Profit: This is an instruction given to the trade to close when a certain price profit level is reached.

Using a Moving Average trading strategy on a DSH/USD pair to demonstrate my understanding on risk management

As we know, the use of a Moving Average is to detect how the market price of an asset changes over a certain period of time. So without wasting time, I would be adding the simple moving average to my DASH/USD pair chart on MetaTrader 5.

As you can see on the screenshot above, the 50-day SMA (blue) has crossed over the 200-day SMA (red) from beneath, and the trend is bullish. So I want to place a buy order using Buy Limit, because I suspect a reversal in the fluctuating market.

As seen on the screenshot above, the current price is at 231.04, so I set my Buy Limit at 224.00, and I equally set the stop loss and take profit at 200.00 226.00 respectively.

Conclusion

Risk is part of trading, but we can minimize it's impact by setting our risk management strategies (putting in place orders to reduce uncertainty in the crypto market). So to avoid major losses, we should not neglect the rules of risk management.
This topic is very important to every crypto trader, so am glad that professor @yohan2on brought this topic to us this week.

Thanks for your time.