Steemit Crypto Academy | Season 3 week 8 -Risk Management in Trading

Introduction

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Hello fellow steemians it's the 8th week of the steemit cryptoacademy season 3 and probably the last week of the season. This week course by @yohan2on is on risk management in trading. This is one of the most important and delicate part of trading. Without a proper risk management we can lose all our asset to bad trades.

1.Define the following trading terminologies; Buy Stop, Sell Stop, Buy Limit, Sell Limit, Trailing Stop Loss,& Margin Call.

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These are common terms used when trading any asset. These are common position taking terms when trading.

Buy Stop

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This is a long/buy order placed in the market when the price is in an uptrend. To place a Buy stop order, you place a long/buy order above the current market price. The order will be executed when the price get to the point we placed our order.

For better understanding the buy order is placed above current market price. To place a buy stop order, the order must be above the current market price so when the price gets there the buy order will be executed. Then we have placed a buy stop order.

Note For a successful buy stop order, the trend must be bullish before we place a buy stop order. Once price gets to the buy stop order point the order will be validated otherwise, the order will remain pending in our order book.
This order is mainly used to trade very volatile market.

Sell Stop

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Similar to the buy Stop order. This is an order placed when the trend is bearish. We placed our order lower than the current market price. This order is place a bit lower than the current market price when the price of an asset is dropping. The market carries our order along when price gets to our order point.

For a successful sell stop order first thing we have to consider is the market trend. When the trend is bearish then we place our order lower than the market price. The order will remain pending in the order book if the market price doesn't get to our sell stop order point. This order are mainly used to trade volatile market.

Buy Limit

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Conversely to the buy stop order, the buy limit order is placed below the current market price.
The buy limit order is a buy order that is placed below the current market price when the price is high. This order is mainly used for retest. When the price goes up and the trader analyze that the trend will retest support so he will place the order at a support point.

For a better understanding of what I just said, when the market is in a bullish trend and it's creating swing point higher and higher we can use buy limit to trade here bacause we know that when the swing high point is created the trend will retest support before moving up again so we place our order at the previous support point the price just broke.

So when the market price is retesting this support, it validate our order. That's mainly how to use buy limit. Am sure we all know that to place a buy order the trend must be bullish.

Sell Limit

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Just like buy limit but for sell limit, the trend is bearish. Sell Limit order is an order placed above the current market price when the trend is bearish. This order is place above the current market price knowing they the trend will retest resistance point due to the trader analysis.

To place a sell limit order the trend must be bearish, when the trend is creating swing low point then retesting resistance point. To use the sell limit in the type of trend, when the price has broken resistance and created a swing point we place the sell limit order at the resistance point so when the price retest the resistance point the sell limit order will be validated.

Trailing Stop Loss

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This type of order allows traders to place orders at a particular percentage away from the current market price. It allows traders to be in profit and protect them from loss.

The trailing stop loss keeps moving by percentage as the price moves in favor of the trader. But it won't move if the trade is not in favor.

Basically the trailing stop loss allows trader to be profit bacause if the trade is in profit, and we set a trailing stop 10% away from the market price the more the price moves in favor the more the trailing stop keeps moving it will keep that 10% distance. The trailing stop loss can be used for both bearish and bullish trend. But once the trade reverse the trend the trailing stop loss stop moving.

Margin Call

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This is for Margin trading trader. Once they receive a margin call they are to make deposit in their account. This occurs when a margin trader funds goes below the required amount expected by his broker due to loss trade.

It's like an indicator informing a margin trader to top up his account. We all know that margin trading requires borrowing money for trading. There is an expected amount that must be available in the account so when a trader gets such alert called margin call they are expected to deposit money in such account.

2. Practically demonstrate your understanding of risk management in tradinguse a moving average trading strategy on any crypto trading charts to demonstrate your understanding of risk management

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Risk management is the method employed by trader in controlling profits and loses when trading. Risk management include setting stoploss and take profit points and risk to reward ratio.
This two strategy are very important in risk management.

Stoploss and Take profit

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Stop Loss is the point we set when entering a trade to stop loss in case the trade is not going in our favour. Take profit points are point we set to maximize our profit when entering a trade. When entering a trade we set our buy price followed by Stoploss and take profit points. To maximize our profit and loss.

For a sell order the stop loss will be above the price while the take profit will be below the price while for a buy order he take profit will be above the price and stop loss will be below. To take this point we should not just pick price values for our take profit and stop loss without calculating the values so we can obey the 1:1 risk - reward ratio.

Most new traders just input values for the Stoploss and take profit and later end up losing the trade or not getting enough profit because their stop loss may be more than the take profit disobeying the 1:1 law. Once the stop loss is more than our take profit the set up is wrong. It's either the margin between the stop loss and take profit is equal or take profit is more.

Risk - Reward ratio

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Risk - Reward ratio means the amount we are ready to lose to get a certain profit. It's just like having 100$ to invest so you consider the amount you would lose that won't affect you in case your trade doesn't goes in your favour. The risk is the amount you are willing to lose to get a certain reward.

So for novices trader, we are expected to use 1:1 risk - reward ratio that means we are willing to risk our 1$ to get 1$. We consider this ratio in setting our stop loss and take profit point. If we invest 100$ our risk to reward ratio is to risk 50$. For every 50$ profit there is a 50$ risk attached.

There are other risk - reward ratio used by expert traders to maximize their profit and loss. For example 1:2 1:3 1:4 and so on.

Use a moving average trading strategy on any crypto trading charts to demonstrate your understanding of risk management

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Using the moving average strategy for the risk to reward ratio, I used the moving average to analyse the trend of the market before place a trade. The moving average shows that the trend is in uptrend then I place a buy stop order using the 1:1 risk to reward ratio I I calculated 10 pips above and below for my take profit points before place the buy stop order.

See screenshot below

Using 10 pips to calculate my take profit and Stoploss position so I can get an accurate result for my 1:1 risk - reward ratio.

This is the screenshots of the trade

And this is the profit I made. From the mini trade I did.

Conclusion

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Finally, I will say every trader should not be greedy because greediness can cause you a lot. As a beginner trader we should always your 1:1 risk - reward ratio to maximize our take profit and stop loss positions to avoid loss of all our asset. We can always use the buy stop and limit to enter trade.

CC @yohan2on