Crypto Academy Season 3 Week 8 Homework Post for (@yohan2on) Risk Management in Trading|| @azamrai
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Buy Stop
It is a limit that is applied when market is on uptrend and we wait for a particular point where we want to place a buy order. As we know that all the time it is not possible for everyone to sit in front of computer and mobile. In this way we have no time to analyze the market that in which direction market want to move. So, in order to achieved particular buy position, we place Buy Stop.
Before apply buy stop, we notice that when market is on uptrend make height at this place our strategic indicators indicates that market will going to further up. In this condition we analyze the chart thoroughly, if we found any resistance in the previous price movement at a current height, then we should wait for breaking this resistance and place the order on upper side of resistance. Because resistance break by market then market definitely go up. This is why we place Buy Stop. In this way we place buy order using Buy stop limit.
Sell Stop
As we wait for place the buy order when market break particular resistance, same in the opposite way wait for placing the sell order when market cross a particular support. We want sell asset when market is on its high point. Market is starting to go down but we are waiting for a point when market breaks a particular support.
When market is going down then we should read the chart and find a strong support level. We place the order just below the support level. If market break this support level than it confirms that market is really tracked on downtrend. When market is break support then our Stop sell order executes and we avoid huge loss.
Buy Limit
This limit is applied when market is on downtrend. This limit is also set after analyzing the chart. If there is a chance of big drop in price of asset then we did not loss this buy opportunity. But all the time we cannot stay in front of market. So this is why we place buy limit.
We set price in buy limit. It means that if market is down enough and touch our buy limit price then our buy order is automatically executed without our presence on market. These limits are very useful. These limits works when we are not present in the market. Through these limits we get advantage by fluctuation of market prices.
Sell Limit
When market is on uptrend and we analyze that further market is going up. We set Sell limit on the upper side of market movement. In this limit when price of particular asset touches our sell limit price on uptrend then our Sell order is automatically executed. In this way we get profit using Sell limit.
Trailing Stop Loss
Trader can avoid loss and get profit. It provides protection to trader from loss. Trader buy an asset for selling when price is quick high with respect to buying price. Trailing Stop loss is applied when price is moving in unexpected direction. It means trader expect that price is moving to upward direction then he sell the asset and take profit.
But the situation is quite opposite to expected movement. Market price is going down. So, in order to avoid unexpected loss, trader set Trailing Stop loss limit. When price is going down and touch the trader’s stop loss limit then it is executed and sell asset at this point to avoid more loss.
Margin Call
This also a type of method in which traders are called by brokerage house if market is having unexpected situation. If all the conditions that are specified by the trader are fulfill by market, then brokerage house alert them to avoid any further loss. In this method brokerage house alerts trader and investor for avoiding the loss if market is going to enter unexpected zone.
This alert is sending to investors by any medium like phone call, Text message and Email. If investor not respond to this margin call, then brokerage house has authority to manipulate funds and do trading according their own. In this way Investors are notified by brokerage house to avoid any further loss.
Question no 2:
What is Risk management in Trading? Practically demonstrate your understanding.
In trading all traders and investor face many risks and dangers in trading. It does not matter because in trading risk are present on every spot. Market is volatile, due to this cause risk are present on everywhere, you do not understand that where market exactly is going on. Presence of risk doesn’t matter but the thing is matter that how to deal and avoid these risks. Few things that we should follow to avoid risk.
- Do not invest money that you Need.
- Do not invest borrowed money
- Do not invest more that 10-15 percent of your money.
- Do not invest money that you do not willing to loss.
There are few more technical strategies for risk management. These techniques help us to avoid risks in trading. Portfolio Management, Risk/Reward ratio and Stop loss Take Profit are techniques that help us to avoid risks. We will discuss these techniques.
Portfolio Management
We should in invest our money in several coins. We should avoid to invest all our money in a single coin. Because if you invest all your money in a single coin then due to market volatility there is chance to crash the market of your particular coin by more than 90%. In this way we lost our money by investing only in a single coin. As you can see in the figure investment in different coins are shown.
Image Credit
So, we should invest in multiple assets as you see the figure. If one coin down then other goes up in this way we can avoid risk. If we invest in multiple coins then we face less risk.
Risk and Reward ratio
In this method we apply stop loss limit by using the Risk and Reward ratio. There are few Risks and reward ratio that are commonly used. 1/2 ,1/3, 1/4 and are risk and reward ratio. If we buy asset that’s current price is $14. If we use 1/2 risk and reward ratio then we set stop loss limit to $12 and sell limit to $16.
If price moves according to our expectation, then we earn $2 from this trade. And if price moves down, when it approaches to our stop loss limit then it sells the asset here. In this trade we loss $2 from this trade. In this way we apply risk reward ratio in trading.
Stop Loss and Take Profit
It provides protection to trader from loss. When price of particular asset goes down unexpectedly. Here Stop loss limit helps the trader to avoid further loss. When price moves down and touch our stop loss limit then it is automatically placing a sell order of our asset.
On the other hand, Take Profit is set when we want sell our asset on it peak price. Before apply sell limit we should do technical analyses to place sell limit for taking good profit from trade. When price goes up and touch our sell limit, then our sell order placed automatically and Take profit from the market. In Take profit we get enough profit from market.
In the above figure you can see all limits are set. If we want to calculate how much profit we take and which risk and reward ratio is fulfill then we calculate all in following.
Buy Price: $399.95
Stop Loss: $388.13
Take Profit: $435.00
Risk/Reward: ?
Risk = Buy Price- Stop Loss
Risk = 399.95-388.13
Reward = Take Profit -Buy Price
Reward = 435.00-399.95
Risk/Reward: 11.82/35.05
All limits are very helpful in trading to avail the opportunity of buying and selling. We will able to place order buy order and sell order without our presence in market. We can place buy order and place sell order on the way where market is going to. We set buy stop and sell stop limits when market is moving according to our expectations and place buy order or sell order in advance. We apply these limit in order to avoid loss and take profit. These are very help is trading to avoid loss and take profit.
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Question 2 required you to use a moving average trading strategy in demonstrating your understanding of Risk management. I did not see any moving averages used in your trading.
Thank you @yohan2on, highlight my deficiency in homework task, I will do my best next.