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

Hello everyone. A very warm welcome in the 7th week of the steemit crypto academy. I hope you all are doing good. I am fit too. This week, the professor @reminiscence01 given us a lecture which is about the "Risk Management and Trade Criteria". I am going to do the homework of this week. Let's start.

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Question 1. What do you understand by "Risk Management"? What is the importance of risk management in Crypto Trading?

The crypto market is highly volatile. The price of the coin keep moving toward up or down time to time. The behavior of the traders effect the market prices and the bullish or the bearish trends occur. The traders no doubt, use a lot of tools and the strategies to predict the market future. But they cannot end in successful way without having a proper knowledge about the risk management. They will face lose and will end their training in lose if they do not manage the risk in efficient way. The traders who manage the risk can earn huge profit and the risk of the losing money get reduce.

Risk Management

Risk Management is extremely important in the trading. The Risk management is actually the actions which are taken before executing the sell or buy order where a lot of strategies and the tools are used to minimize the loss, to reduce the risk ratio and to maximize the margin of getting profit. The traders who have proper knowledge of the risk management and manage the risk in their trading in efficient way, they end the trading with high profit. If they perform some trading and even if some among them goes in lose, they still will win the trading because of the proper risk management strategies.

The risk management involve the strategies which help the traders to predict the risk of losing money in trading in future and then manage the risk in order to control the lose and maximize the profit.

Every trader want to earn high profit from trading. The earning is the basic goal of each trader. To obtain this goal, the traders must have proper knowledge of how to manage the risk. They use the multiple tools and strategies to minimize the loss and to maximize the profit. The risk management should be learned by each trader in order to trade in successful way. Without having the knowledge of the risk management, the traders can lose their money even after using the tools and strategies to predict the market future. If they do not predict and forecast the future risk and do not manage them properly using the risk management strategies, they can not end up in a good and profitable way.

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Importance of Risk Management in Crypto Trading

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Minimize the Risk of losing money

Crypto market is very risky. There are always risks of losing money because of volatile nature of the crypto market. The price keeps rising up or falling down and this volatility may become a big reason of losing the money. But if the traders manage the risks properly using the suitable tools and strategies, they can be safe from the risk of losing money. They predict and forecast the future risks before execution of the order and then adopt the strategies to minimize those risks. In order they can trade in safe way.

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Maximize the profit

The Risk management is extremely important. It helps the traders to earn the high profit and to maximize the reward ratio. With proper risk management, if a trader perform some trades and even if he end up with losing some trade and win some trades, he even is in the profit. The risk management helps to get the high reward. The risk ratio get reduced and the profit margin get high.

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Control the emotions

Sometime, it may happen in the trading that the market start moving in an un expected direction and the traders lose their money. They were not ready for this lose. To recover this money, the stay in the market with hope that the price will rise up and they will get the reward which will help to cover their lose. But this may bring another lose for them. They face the lose again. The risk management save the traders from such conditions where the traders get emotional and these emptions bring them huge lose. The traders manage the risks in trading with using multiple tools and thus safe from trading by being getting motional.

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Set SL and TP

The traders in the risk management set the limits. They set the limits and the Stop lose and take profit. They then become well aware that how much lose they can suffer and how much profit they want to earn. Then the trade achieve their goals. The traders usually prefer to set the stop lose and take profit ratio as 1:2. But it can be 1:3 or 1:4. The take profit always set high as compare to the stop lose.

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Consistency

When the trader face the lose in the market, they may get disappointment and may think that their trading strategy have gotten fail. They may start considering the other strategies. They cannot be consistent and this inconsistency may bring them heavy lose. But if the traders have manage the risk earlier, they become more consistent and thus can trade with more concentration. This consistency and concentration being them high reward and good profit.

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Confidence

The traders become more confidence when they trade by managing the risks. They have well knowledge about the market unexpected risk and they manage the risk which make them more confident about their trading. They manage the risk before execution of the order which help them to minimize the risk and will bring the confidence among them that they will surely end up with high profit.

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Question 1. Explain the following Risk Management tools and give an illustrative example of each of them. (a) 1% Rule. (b) Risk-reward ratio. (c) Stop loss and take profit.

I will now explain the rules of the risk management with an illustration of each of them.

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1% Rule

The 1% Risk is a tool which is use to manage the risk. This is very popular tool which the traders use to manage the risk in trading. This help to get high profit and the risk get reduced to great extent. The 1% Rule mean the traders cannot afford to lose more than 1% of the total capital in the trading. The stop lose is set to 1% of the total capital and when the price hit that limit, the trade end and traders exit from the market to safe from the more lose. Thus they can have only 1% lose of the total amount.

The traders stop the trading when they have the 1% lose of the total traded assets. They cannot suffer more than this lose. This help to end the trading in healthy way. This risk management tool is very popular all across the world. The traders use it to manage the risk and thus can trade in successful way.

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Let suppose that i have 100$ in my account. I have invested all my assets in the trading. I have invested my assets in 10 trading and the risk management tool which is use is 1% rule. I have manage the risk using the 1% rules. It's mean that in each trading, i will have the lose o

1/100 x 100 = 1$

In case of the unsuccessful trading, I will have the 1$ lose in each trading. Now let suppose that all 10 trading went against me and i have the lose. It's mean that i will have the lose as follow

1 x 10= 10$

I will have the lose of the 100$ if all the trades goes against me. I will have now 90$ still in my account. This risk management tools is highly beneficial and useful. If the traders face lose, they still end while having the amount in their account. This risk management tools is extremely beneficial and safe the traders from the high lose.

I case i set the lose at 5$, then with each unsuccessful trade, i will lose 5$

5/100 x 100 = 5$

As i have invested my 100$ in 10 Trades, then in case of failure of all the trades, i will have lose of 50$;

5 x 10 = 50$

This is very high lose. So will just have the 50$ left in your account. This mean that the 1% Rule is very useful and the traders cannot suffer much while trading with 1% Rule.

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Stop Lose and Take Profit

Another very effective and useful risk management tool is known as the Stop Lose and Take Profit. This is very useful tool. These two are the exit orders which are set to manage the risk. The Stop lose and Take profit ratio is set before starting the trading. The traders set the level of the profit which they want to earn from trading and also set the lose level which they can suffer.

The stop lose mean the lose which the traders can afford to lose. This order execute when the market move against the trader.

The Take profit mean the profit which the traders want to earn from trading. this order execute when the market move in the trader's favor.

When the market move in their favor, the take profit order execute. When the price hit the take profit level, the trading end and traders exit from the market by earning the profit which they have set before starting the trading. They have achieved their goal. Similarly, when the market go against the expectation of the traders, the stop lose order is executed. When the price hit the stop lose level, the trade end and traders exit from the market to face from the further lose. Then the trading end and the traders have the lose only which they have set.

Both these help to manage the risk. This is very popular and well known tool which the traders use in the trading world to manage the risk. The stop lose safe them from the high lose of money. The take profit order execute when the traders earn the money as much they want from trading. Both these are very helpful to achieve the goals in the trading and to safe the capital of the traders.

Let suppose, I have 10 dollar and you want to invest that in trading. I manage the risk using the Take profit an Stop lose tool. I set the Stop lose and the Take profit as 1:2. You stop lose should be very tight. Your take profit always be high as compare to the stop lose. The Take profit should be as much amount as you want to earn from trading. Let suppose, I have set the Stop lose and take profit with ratio 1:2.

Its mean that i only afford 10$ lose if market goes against me. The Stop lose order will be executed when the market hit that level and the trade will be end. I will have the lose of 10$ only. Now if the market decline more, i will be safe from the more lose because my STop lose order have saved me from the further lose.

Similarly, take profit is 20$. It's mean that i want to earn the 20$ from th trading. If the market move in my favor, the trading will be end when price hit the take profit level and i will have the 20$ profit.

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Risk Reward ratio

This Risk to reward ratio is another tool which is being utilize all across the world by the traders to manage the risk. If you do not have set the risk to reward ratio in proper way, you may end in lose. If the market is moving in your expected direction and you do not have se the risk to reward ratio in efficient way, you still may face the lose. Similarly, your reward may turn into the lose because of poor under standing and knowledge of the risk to reward ratio.

In risk to reward ratio, the traders should set the risk which they can afford in the trading and the reward which they want from trading. The reward ratio should always be higher than the risk ratio. The risk should be minimize and the reward should be high.

Let suppose, i have 10 dollar which i want to invest. I have set the risk to reward ratio as 1:3. Its mean that the risk which i can afford is only 1% of the total capital which is just 1$. And the reward is 3% which is 3$.

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Question 3. 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.

The following are expected from the trade.

• Explain the trade criteria.
• Explain how much you are risking on the $100 account using the 1% rule.
• Calculate the risk-reward ratio for the trade to determine stoploss and take profit positions.
• Place your stoploss and take profit position using the exit criteria for market structure.

Trend Reversal using Market Structure.

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Entry Criteria

The below is the chart of the LTC/USDt which i taken from the tradingview.com. There are some higher high on the chart where each high is higher than previous high. The price is rising upward which mean that their is the bullish trend in the market.

Then the price fail to form another higher high which is not high than previous higher high. The price was pushed to upward after a pull back by the buyers but they fail to form the higher high to continue the trend. The market structure break out Here

Then again price raised up and form the resistance. Then again the sellers push the market downward and the price broke the support level. The red candle will be formed which give the signals to place the order.

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Exit Criteria

I will place the sell order. The stop lose will be set a bit above the resistance level. When the price hit the stop lose value, the trade will end and we will exit from the market. The stop lose value was . The Stop lose and take profit ratio was set as 1:2. The take profit was placed at the support level. The take profit value was

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Conclusion

Risk Management is extremely important in the trading. The Risk management is actually the actions which are taken before executing the sell or buy order where a lot of strategies and the tools are used to minimize the loss, to reduce the risk ratio and to maximize the margin of getting profit. The traders who have proper knowledge of the risk management and manage the risk in their trading in efficient way, they end the trading with high profit. If they perform some trading and even if some among them goes in lose, they still will win the trading because of the proper risk management strategies.

@reminiscence01