Risk Management and Trade Criteria - Crypto Academy / S5W7- Homework Post for @reminiscence01

cover photo made by @sargoon

Hello, Steemit Crypto Academy community! Here I am with my new homework post for Steemit Crypto Academy Beginner courses. In this homework post, I will give you information about Risk Management and Trade Criteria. I would like to start my homework by explaining "What is the importance of risk management in Crypto Trading?".

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

As there is risk in every aspect of life, there is also a risk in cryptocurrency trading. Since cryptocurrencies are more volatile than other currencies, if the risk is not managed well, it can cause serious losses. Don't let this scare you, because doing the right risk management when trading cryptocurrencies will greatly reduce the potential losses in your trades. Although there are indicators, technical analysis, and many other tools, we may rarely encounter unexpected price movements due to high demand, as human beings are rational beings.

Before trading with cryptocurrencies, you need to determine the cryptocurrency you will open a position in and examine its chart in-depth. First of all, you need to determine the support and resistance levels in the short or long positions that you will open according to the condition of the chart. This is very important because, for example, just below the support point you set before entering a long position will be your stop loss point, that is, your exit price. While determining the take profit price, we need to create a take profit order as x2 of the possible loss value that you set as the stop loss. Thus, you can avoid high losses by setting your risk-reward ratio as 1:2.

Novice investors who have just entered the crypto money market, unfortunately, do not create a stop-loss order and create a high profit-oriented sell order without analyzing the chart, and as a result, the prices of the cryptocurrencies they buy often move downwards, and novice investors see that they lose their money because they do not place a stop-loss order and run away from cryptocurrencies. The price of each product, such as cryptocurrencies, may suddenly fall or rise, taking this into account, we need to enter a stop-loss order for every transaction we will make in order to keep the possible losses at the lowest level.

What is the importance of risk management in Crypto Trading?

Risk management is the most important thing for cryptocurrency trading. By making the right risk management, all novice or professional traders minimize their possible losses by placing stop-loss orders just below the support point. Investors who manage risk are not affected by possible price decreases because they will lose as much as the loss they risk even in a very severe downward price trend thanks to the stop-loss they create when they open the position, and most of their money will still be in their hands.
On the other hand, investors will significantly reduce the risk factor in take profit orders thanks to the 1:2 risk-reward ratio and will guide the investors to exit the market at the right time.

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.

1% Rule

The 1% rule is much safer than any other rule in my opinion, and it is a rule that helps to keep the loss to a minimum. As the name suggests, this rule means that when investors enter the market, they only risk 1% of the total money in their wallets. To explain numerically, for example, let's say we have 1000 dollars, we opened 5 trades and let's determine the maximum loss we will make for each of these trades as 1%. This means that we will only risk about $50 of the $1,000 we have. To explain mathematically:

Total money: $1000
Possible loss rate (stop-loss): 1% = 1/100 = 0.01
Number of Open Positions: 5
Calculation: $1000 x 5/100 = $50, probable loss for all open positions, 1% loss per position.

Since an investor who follows this rule loses only 5% of all the money in his wallet, up to 95% of his money will be in his wallet and he can continue to trade safely.

Risk-reward Ratio

The risk-reward ratio is to limit the amount you will win and lose on the position you open. It is always safe and sensible to keep the risk-reward ratio of 1:2. If you make the risk-reward ratio 1:2; Assuming that you set the risk of 3% with $1000, that is, you place the stop-loss order at $970, you need to set the take profit order as a 6% reward rate according to the 1:2 reward ratio rule. In this case, if the price goes down, your stop-loss order will work and your $1000 will drop to $970 with the 3% risk rate you set. If the price goes up, your take profit order will work and your $1000 will reach $1060 with the 6% reward rate you set.

Stop-loss and take profit

The stop-loss is the most important order among the stock market orders. All traders must determine the stop-loss points before they open the position and immediately create an order at the stop-loss point they have determined when they open the position. By using stop-loss, traders limit their losses and instead of losing a large part of their money, they lose for the small amount they risk.

Take profit order is often used by traders who think that the market will turn into a bearish trend. If the coin is very bullish and still in an upward trend, when the coin they invest in makes a profit, instead of withdrawing all the money, sometimes they just take profit and continue to keep their money in that coin. With this order, traders limit the profit in the take profit order just as they limit the loss in the stop-loss order.

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

SHIB/USDT pair from tradingview

As you can see in the chart above, the price accumulated for a long time, and then the trend reversed and turned into a strong uptrend. At the resistance point I determined, the market structure is broken down and a candlestick broke the resistance point and started an upward movement. After the resistance was broken, the pullback movement, which was confirmation of the bullish trend, was immediately formed and the price entered an upward trend again after the retest and increased approximately 3x. After this uptrend, the trend reversed again and the bearish trend started.

Exit Criteria

SHIB/USDT pair from tradingview

The orders we need to specify for the exit criterion are stop-loss and take profit orders. At the point where the market structure started to deteriorate, the price returned to an upward trend with the breaking of the resistance, then retreated with a pullback movement and retested the support point, and continued its upward trend in a promising way. After the pullback movement, the re-test was completed successfully, we set our entry point and set a risk-reward ratio of 1:2 just below our entry point.

Trend Continuation using Market Structure.

BTC/USDT pair from tradingview

As you can see in the chart above, I created a long position in the BTC/USDT pair and used the 1:2 risk-reward ratio and the 1% rule at the same time. I created the stop-loss order as %0.5 and the take profit order as %1. At the end of the trade, the price above the trend line I determined on the chart and showing the upward direction increased by 1% a few seconds after I opened the trade, and my take profit limit order worked, the trade was closed with profit.

BTC/USDT pair from tradingview

At the end of the trade, the order to take profit from the 1% profit and 0.5% stop-loss orders worked and my demo account balance of 100 dollars increased to 101 dollars by making 1% profit.

Conclusion

Investors must strictly follow the risk-reward ratio, 1% rule, and stop-loss - take profit orders. Limiting take profit is just as important as limiting loss because no cryptocurrency goes up forever, so you should always base your take profit order on a 1:2 risk-reward ratio to your stop-loss order. In this way, your trades will be much safer and you can make new trades without losing all your money. Although indicators and all other technical analysis tools are very reliable, prices can make sudden movements due to high demand or high panic of people and you may lose a large part of your money without even realizing it, so please do not forget to create your stop-loss order immediately after creating a position! :)
Best regards to Professor @reminiscence01 for sharing this homework. Thank you so much for reading my Steemit Crypto Academy post! :)