Capital Management and Trading Plan - Crypto Academy / S4W8 - Homework post for @ lenonmc21
Hey guys,
Welcome to the 8th week of the Steemit Crypto Academy lecture by professor @lenonmc21.
Without wasting much of our time, let me quickly proceed with the tasks at hand.
QUESTION 1
Define and Explain in detail in your own words, what is a "Trading Plan"?
It's obvious that trading cryptocurrency is risky due to its price volatility. This volatility makes it often difficult to predict accurately what the outcome of a price will be within a given period of time.
This difficulty in accurately speculating price movement is what has brought about the use of the trading plan.
It is obvious that in other to increase the chance of success in one's dealing, one needs to have plans.
This said plan doesn't just end on " how to do the task ahead" but also "what to do when the task ahead has been successfully done" and "what to do if one fails on the task ahead".
Putting all this into consideration will make up a good plan.
Having seen what it means to plan, let's look at Trading plan.
A trading plan is the act of making detailed preparations, mapping out rules and guidelines for oneself in other to create discipline in relation to trading.
A trading plan involves a series of decisions that a trader is self-mandated to keep to in other to avoid excessive loss due to lack of discipline.
Trading in done with capital and for that reason, plans should be made in other to safeguard it and utilize it more efficiently in other to maximize profit and minimize loss.
This management is done by mapping out a percentage that a trader is willing to risk on from his or her capital for each trade and also mapping out a percentage that he or she is ok will gaining on each trade.
This loss to gain ratio is best set at 1:3.
This means that for a capital of $100, a trader is willing to risk 1$ on each trade and is also comfortable with gaining $3 on each trade.
Therefore, once the trader makes a loss of 1% on a trade, that's the end of the trading. It's the same thing with when he makes a gain of 3% on the trade.
Putting all the above into consideration and mapping out a good guideline is what is known as a trading plan.
QUESTON 2
Explain in your own words why it is essential in this profession to have a "Trading Plan"?
The cryptocurrency market is very volatile and this volatility makes it risky for traders. In other to minimize loss during trading, a mapped-out plan should be used.
This plan helps a trader to exit the market when a certain percentage of loss has been made or when a percentage of gain has been made in accordance with the trader's set rules.
A trader who is without a trading plan is at great risk of losing his or her capital to the uncertainty of the market no matter how good he or she is in using technical analysis.
Experts also use trading plans despite their level of expertise. This plan helps them to develop discipline and put their emotions under control.
We all should be familiar with the term revenge trading.
This occurs when a trader is bent on recovering lost capital for the fact that he or she doesn't want to end a trade in loss. This often leads to more loss because emotions are already in control of the trader.
The above reasons are why a trading plan is very essential for every trader and should be maintained regardless of any trade outcome.
QUESTION 3
Explain and define in detail each of the fundamental elements of a "Trading Plan"
The fundamental elements of a trading plan includes:
- Risk Management
- Capital Management
- Planing and control
- Trading psychology
RISK MANAGEMENT
This is one of the fundamentals of a good trading plan which deals with having a daily trading limit.
This daily trading limit should be obeyed at all costs.
Let me explain what I mean by having a daily trading limit.
Let's say, I plan on making 4 trades in a day with a maximum of two losses. This means that once I successfully complete 4 trades, I will close trading for the day no matter how favorable the market is. And if I happen to lose two trades, I will still end trading for the day whether I have completed my plan for trades or not.
CAPITAL MANAGEMENT
This is one of the fundamentals of a trading plan which deals with the management of capital.
Here, a trader is expected to map out a percentage of their capital that he or she is willing to risk. This percentage is best kept at 1% in other to minimize risk.
Also, a trader is also expected to have a maximum profit percent of which he or she is expected to exit the market once attained. This profit percentage is best kept at 2-3% depending on the amount of capital.
For instance, a trader has a capital of $100 with a profit to loss ratio of 3:1. This means that the trader is only willing to risk 1% of his capital which is $1 and is also very much satisfied with a profit of 3% of his capital which is $3.
In other maintain this loss to profit ratio of 1:3, a stop loss is set at 1% from and a take profit is set 3 times the position of the stop loss but in opposite direction.
PLANNING AND CONTROL
This is one of the fundamentals of a trading plan which deals with the planned method of growing one trading capital daily using risk and capital management.
What do I mean?
A trader who has an initial capital of $100 started trading and applying the already discussed trading plans.
With a profit to loss ratio of 3:1 and a maximum of 4 trades daily.
Assuming the trader was successful on the 4 trades, that will mean that he or she will be sitting on a $12 profit for the day.
Now, this is where planning and control come in.
Instead of the trader trading the next day with the same initial capital of $100, the trader will this time be trading with $112 which is the initial capital + the profit made the previous day.
This way the trader will be able to grow his capital and make more returns daily.
TRADING PSYCHOLOGY
This is one of the fundamentals of a trading plan which deals with emotions.
Trading deals with a lot of emotions involved especially fear and greed.
The above mention is one of the common emotional problems that a trader often deals with.
Imagine losing your first two trades in a day, it will take a whole lot of discipline in other to end trading for that day because you would want to recover those losses before ending for the day.
The quest to recover already made loss by opening a new trade is what is popularly known as revenge trading. Once a trader starts trading in other to cover loss, he or she losses sight of the aforementioned trading plans which in turn leads to more losses and frustration.
Greed is another aspect of the emotional battle that a trader has to deal with. It usually occurs when a trader is in constant profit, he or she will tend to lose sight of his or her trading plan.
PRACTICAL QUESTION
Build a “Trading Plan” and cover all the basic elements discussed in the class. For this, you should NOT take the examples that I put in my class (Including the example amounts), use your examples and your images to make a said plan, you must also base this "Trading Plan" as if you were operating on the platform of " Binance ”, taking into account that the minimum amount of exchange or investment is $ 10.
From the above;
The first column shows a number of months ranging from 1-6 months.
The second column contains the various amount of capital. It increases as the month increases because capital is being combined with made profits in other to raise higher capital.
The third column contains the 1% percentage loss. And its value increases with an increase in capital.
The fourth column contains the percentage gain. Its value also increases with an increase in capital.
The 20 days profit. This is the calculation of the daily 3% profit multiplied by the number of days (20days).
The last column contains the total profit made in 20 trading days in addition to the initial capital of the month.
From the above, it is obvious that I trade 5 times in a week which sums up to 20 days in a month.
RISK MANAGEMENT
My risk management is making a maximum of 4 trades in a day with a maximum of 2 losses. This means that if I should lose two trades before completing my 4, I will also end the trade for that day.
CAPITAL MANAGEMENT
I manage my capital by using a profit to lose ratio of 3:1 just as seen above.
MY TRADING GUIDELINES
I will not trade when I am not in the right frame of mind.
I will not trade with borrowed funds to avoid unnecessary pressure.
I will not volunteer to manage someone else's capital because that will put me under pressure as I wouldn't want to disappoint the person.
I will not pressure myself in making it faster. In other to avoid risking a larger portion of my capital.
Slow and steady wins the game. In other words, I will keep to my trading plan no matter what.
CONCLUSION
Trading plan is very essential in cryptocurrency trading in other to minimize loss and maximize profits.
One with a trading plan is expected to be disciplined enough to keep to it at all costs.
I have really learned a lot about the benefits, importance, and how to map out a good trading plan. Thanks to professor @lenonmc21 for this wonderful lecture.