Risk Management in Trading
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Thank you, Professor, @yohan2on for this lecture on risk management. The failure in the area of managing the risk in trading has made more traders lose their capital, more than any other factor. I am happy to be part of this class and I will try to answer the questions as directed.
This is an order entered at a stop price above the current market price. It is used to limit a loss or protect a profit on a stock that is sold in short term.
For example, if BTC is trading at $45,000 and the trend is bullish, the trader places a buy stop on $45,200 to ensure that trade buys at that point if it gets there. This can be illustrated on the chart below:
The sell stop order is used when selling. Here, there is a price specification, in that the trader specifies a price to sell and place the order there. The sell stop order is placed a little below the current selling price.
In margin trading, a sell stop can be set to initiate a short-selling point. It ensures that the loss is limited and the profit is protected.
As an illustration, let's consider a trader who bought Ethereum for $35 and is willing to only accommodate a loss of $5. A sell stop can be placed just below the $30 level. When the price gets to about $29.95, the sell stop is triggered.
This is an order placed by a trader to buy the chosen asset at a specified price different from the current market price. Mostly, buy limit orders are placed at a lower price than the current price of the asset. It is common with spot trading.
For example, if BNB is trading at $402, a trader can place a buy limit at $395. When the price of the asset gets to that limit, a buy order is triggered and the asset is bought.
Setting a buy limit is not a guarantee that the asset will be bought at the set price. If the price never gets to the limit placed, the asset will not be bought.
This is a limit order placed to sell an asset at a price different from the current price. A trader can place this limit to sell at a price that will favor him, either in spot or margin trading.
For example, a trader who bought DOGE coins at $0.12 can place a sell limit at the price of $0.24.
Just like a buy limit, a sell limit allows a trader to set a sell order at a specific price and when the price gets there it sells automatically. It is used to limit the risks involved in trading.
This is a stop-loss order that uses a percentage in prices. Rather than use a single price value, the trailing stop loss places stop-loss at a specific percentage below the market price. The stop loss trails behind the current price.
It is used to lock in profits while keeping the trade open while waiting for the price to hit the set trailing level.
Margin call takes place when the money value of the investor’s or trader’s margin account falls below the broker’s required amount. A margin call simply refers to a call by the broker to the trader to deposit more funds to the account to bring up the minimum value of the account to a specified amount known as Maintenance margin.
The maintenance margin is set by the broker to protect the investor from total loss of funds. In the event of a margin call, the investor can either sell some assets and exit the trade or deposit more funds. Where the investor fails to do either of the two, the broker will liquidate the account to avoid a total loss of funds.
Trading is full of risks. Thus, it is expedient to manage these risks to maximize profits and prevent losses to some reasonable extent.
For example, Peter is a spot trader on Bitcoin. He buys when the price is low and sells when it is high. To maximize profits, he places a limit to sell his asset at a profitable price, and when buying he places a buy limit at a price that favors him.
For margin traders, the stop loss is used to avoid too many losses.
This moving average strategy employs two moving averages. Used to identify when to get in or out of the trade, this BTC/USDT chart shows that a trader can employ two periods: a short period and a longer look-out period.
Let’s say a 21 and 50 moving averages, or 50 and 200 moving averages can be set and then wait for a cross-over.
When the short period moving average closes over the long period, it is likely that the trend will be bullish, and such the trader begin to buy the asset. If the opposite is the case, then the trader should fade and sell.
The issue of risk management is paramount for a consistently successful trading experience. No trader is 100% profiting without a loss. At times some bad trades occur because the market behavior is under speculations.
Thus, as a trade, risk management strategies should be employed to reduce losses and maximize profits.
Thank you for reading.
Hi
Thanks for participating in the Steemit Crypto Academy
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This is under-average work. You had no screenshots/images while explaining the first 4 trading terminologies. You also missed out on the very important aspect of setting the Stop Loss and Take Profit on your chart. You need to put more effort into your work.