Steemit Crypto Academy | Season 3 Week 8 - Risk Management in Trading by @small-ville

Define the following Trading terminologies; Buy Stop, Sell Stop, Buy Limit, Sell Limit, Trailing stop loss, Margin call.

• Buy Stop

The Buy Stop is a trading feature seen mostly in Trading/Brooker platforms. This feature is used to place a buy order above the current market price trend so that when the price trend hits the order request it automatically approves a buy order for the trader.

Until the market price reaches the Buy stop order, it will remain as a pending request. This is mostly used when there is an assured certainty of the market's uptrend, but it is based on probability.

• Sell Stop

The Sell Stop, just like the Buy Stop is also a feature on Broker/Trading platforms, which is used by placing a sell stop order below the market price. The Sell stop order is executed once the market price strikes the sell stop order.

The sell stop is used when there is an assured certainty that the market downtrend would continue in the long run.

• Buy Limit

The Buy limit is a buy order placed below the current market price, so that when there is a trend reversal the market price would be able to hit the buy order, by doing so the Buy limit order would automatically initiate a buy order.

This feature is mostly used when a trader is assured that the current price movement has been heavily been overbought, so the buy limit order is placed as a lookout for a short retracement in the market price. With this in mind, the trader should know that the overall market is in a bullish trend.

• Sell Limit

The Sell Limit is a sell order placed above the current market price. This feature is used when the current market price trend has been overbought.

The trader uses the Sell Limit as a check for a quick retracement in the current downtrend of the market so that a sell order is automatically activated once the market price retraces to the Sell Limit order.

• Trailing stop loss

The Trailing stop loss is a Trading feature used by traders to limit losses. The trailing stop loss is a modifiable version of the normal or fixed stop loss. The trailing stop loss is activated once a trade has been placed, but it only moves in one direction, which is only in favour of the trader, as the market price moves into profit the Trailing stop loss is automatically modified based to trail behind the market price based on the percentage that it was set at to trail the market price. The Trailing stop loss automatically locks profit in favour of the trader and continues to do so until there is a reversal in the market trend, then the Trailing stop loss stops moving.

• Margin call

A Margin call occurs when the funds in the account of a trader have run below the percentage required by the Broker. This often occurs when there have been huge losses due to failed trades. The Margin call can also affect ongoing trades because the broker would automatically cut off all trades in order to achieve the required percentage of the margin call and until the reader is able to restock the account with funds he/she would not be able to execute trades.

What is Risk management in Trading?

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During the last market bull run, there has been a lot of people interested in trading because of the profits made by orders, but most of these new traders are quite unaware of the dangers associated with trading which could result in loss of valuable assets, even pro trader are not totally immune to this problem of loss in funds. This is why the need to know all about risk management in trading, that is what I will be elaborating on the different avenues or precautions one needs to take before or after embarking on a trade.
Risk management is precautions taken by a trader in order to minimize losses in relation to a particular trade. These precautions include the Stop Loss and Take Profit and the Risk reward ratio.

• Stop Loss and Take Profit

The stop loss is a feature mostly seen in the Trading/Broker platforms, it is placed below a buy order so that when there is a price reversal the losses would be limited also when it is placed above the sell order it would limit the losses when there is a reversal in price trend. This feature is used to eliminate the fear of huge losses to the investor/trader.

The Take Profit feature is set so that the trader can automatically take the profit of an executed trade, without the trader logging on to the trading platform. The Take profit is already predetermined by already predicted analysis by the trader so that they can take their profits without being too greedy, although sometimes the market price may not reach the desired take profit.

• Risk reward ratio

This is the number of losses a trader is willing to make in order to make a profit. for example, if the risk-reward ratio is 1:7, it means that the trader is willing to make a loss of $1 in order to make a profit of $7, but the risk-reward ratio should be set according to experience in trading and also in the size of the trader's account.

Use a Moving averages trading strategy on any of the crypto trading charts to demonstrate your understanding of Risk management.

Using the moving average, I noticed that the market was moving in a downtrend so I had to place a sell order. In order to apply risk management, I modified the Sell order in order to introduce Stop Loss and Take Profit. This would help me minimize my loss in case the market moves against me and also help me take automatically my profit once the market price hits the Take profit.