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

in hive-108451 •  5 months ago 

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Greetings everyone,

Welcome once again to another wonderful episode in the crypto Academy community. Before I present my homework post, I would like to acknowledge the professors and the crypto Academy community for making such an educative lecture possible. Today’s topic is simple Risk Management and Trade Criteria

Without wasting enough time I would present my homework post systematically based on the questions from the professor @reminiscence01.


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


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Trading has become the order of the day. Most people associated with the crypto ecosystem learn different techniques and strategies to perfect their trading skills. However, with all strategies and skills, traders require some psychological mentality to become good traders.

Usually, the difference between inexperienced traders and experts is the mentality. both parties may be using a similar strategy but the expert would earn more than the amateur. This brings us to the main topic risk management. Risk management is a very important aspect concerning trading. Risk management talks about managing your loss in case the trade didn't end well. As we are all aware, losses are part of trading. However, minimizing your loss is very important as well.

It is very important to set a take-profit ratio larger than the stop loss in case of trading. Usually, traders prefer a 1:1, 1:2, or even higher ratio in favor of the profit. A good trader should have a solid entry and exit point. It is very advisable not to set a stop loss very close to the entry else your trade could take you out very quickly before your T.P hits.

From my experience, trading could be very profitable at the same time fruitless. Without good risk management, a trader could blow his or her account quickly. Using a bigger lot size with small funds in the account is very risky and not advisable. Not long ago, I made a trade with a bigger lot thinking it would enter into profit for me to close position very quick to take profit. Although the trade made a profit I realized I was very lucky because I had enough funds for the trade.


Importance of Risk managements


Risk management helps traders in so many ways. first and foremost, traders practice risk management to reduce or minimize their losses. Every trader would like to earn more than the loss in case of any inconvenience. with risk management, traders can set a stop loss smaller than the take profit in case the trade didn't end well. in the case of inexperienced traders, they get to save their accounts from blowing up.

One importance of risk management is that it prevents irritation. Usually, traders who end up losing more of their asset sometimes gets irritated by their loss and try to recover their losses by entering the market blindly to make profits. which may end up in blowing their accounts. However, good risk management saves all the emotions and keeps the trader focused.


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2. Explain the following Risk Management tools and give an illustrative example of each of them.


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1% Rule


The 1% Rule is a strategy that prevents a trader from losing more than 1 to 3 % of the asset to a particular trade. This strategy is one of the best risk management methods. It is always advisable to minimize your risk to prevent your account from blowing. there's a saying that, successful traders don't make their profits from a single trade. However, it is advisable to use this 1 % rule to secure your capital.

Scenario

Let's assume you have loaded your broker account with $400. According to the 1% rule, you should only risk 1% of the entire capital. That's in case the trade ends in a loss, you should only lose just $4 since one percent of 400 is 4.

incase you executed 3 trades, the 1% rule says you should only risk $12 since the maximum risk percentage is 3%. However, in case you executed 5 trades at a particular time, it means you should use a lot size which would estimate the loss to be $12. which means, you are losing $4 on trade since they are 5 trades now but rather $2.4 in case of equal lot size. losing $4 on each trade would end up losing $20 which is 5% which violates the 1 % rule.


Risk-reward ratio


The Risk-reward ratio is very important with any type of trading. The risk-reward ratio is simply the amount of profit you are willing to make and the amount you are willing to lose from a particular trade. Usually, traders set an equal ratio of profit and loss. However, it is best to increase the profit ratio than the loss. Preferably, 1:2 1:1.5 over even more. Moreover, you can also break even in case the trade move your way to be risk-free.

Scenario

let assume you are making a buy trade on ETHUSDT. Initially, your take profit was 100 pips while your stop-loss is around 50 pips. using a 0.01 lot size means you would earn 10 dollars in case of profit and lose 5 dollars in case of loss. Always make your take profits higher than the stop loss ratio.

Moreover, you can also break even. That is when the market move 50 pips in profit, you can either adjust your stop loss at the entry or even above. In that case, you know you are risk-free and in case the market reverses, you wouldn't lose any money. You can be adjusting the stop loss and take profit in case the market is still moving your way. In that case, you can earn more than you initially expected.


Stop loss and take profit.


This is the most important of risk management. In my opinion, this is the first part of risk management. Every trade should have both a stop loss and a take profit. As we are all aware, the crypto market is highly volatile which may swing up and down in a split second.

Stop loss is the level you agree to take the loss when your trade reverses against your trade. Take-profit on the other hand is where the trader wants to close position to take profit. In case the trader failed to set a stop loss, when there's a sudden dip or boom market, the trader could blow his or her account.


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3. Open a demo account with $100 and place two demo trades on the following;(Original Screenshots on Crypto pair required).


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Trend Reversal using Market Structure


Trade Criteria

  • To trade with market structure,
  • Identify a clear trending market
  • Identify the higher highs and higher lows
  • incase of a bullish trending market, allow the market to break the lower high to show a clear reversal confirmation.
  • incase of a bearish trending market, allow the market to break the higher lows to show a clear reversal confirmation.
  • Place a buy order or sell order at the point where the market break the structure.
  • set a stop loss and a corresponding take profit

Buy trade of ETHUSDT


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From the ETHUSDT chart above, we can see clearly that, the market is in a bearish trend. here, our main motive is to identify the point of reversal of the ETHUSDT. After identifying the reversal, I confirmed the market price on another time frame and I realized the market is also forming double bottoms which indicate a clear confirmation. from the trade above, we are using a risk-reward ratio of 1:1.5.


Considering the 1% rule on a $100 account. we need to use a small lot size on the particular trade. However, I used 0.1 lot with the ETHUSDT. Considering my stop loss which is 3695, I wouldn't lose more than $3 in case the trade ends up in a loss.



b) Trend Continuation using Market Structure.


Trade Criteria

  • To trade with market structure continuation,
  • Identify a clear trending market
  • Identify the higher highs and higher lows
  • In the case of a buy trade, place a buy trade at the point where the market forms a higher low.
  • In case of a sell trade, place a sell order at the level where the market form lower highs
  • set a stop loss and a corresponding take profit

Buy trade of BTCUSDT


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From the BTCUSDT chart above, we can see clearly that, the market is in a bullish trend. here, our main motive is to trade the continuation of the BTCUSDT. From the trade above, we are using a risk-reward ratio of 1:1.5.


Considering the 1% rule on a $100 account. we need to use a small lot size on the particular trade. However, I used 0.01 lot with the BTCUSDT. Considering my stop loss which is 46954, I wouldn't lose more than $3 in case the trade ends up in a loss.


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CONCLUSION

Overall, I would say great lecture. Risk management is very important when it comes to trading. From my few month's experience in trading, I think trading requires strong psychology. Inexperienced traders begin to panic when the trade begins to move in the opposite direction. I would advise you all to stick to our plan and have patience. For me personally, I have closed many positions to take the loss while I could have earned more if I had held for a little longer.

Do not risk money you are not willing to lose. better still, you can stick to the one percent rule to avoid losing a lot of money.



Thanks once again for such a wonderful lecture
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Hello @avagah, I’m glad you participated in the 7th week Season 5 of the Beginner’s class at the Steemit Crypto Academy. Your grades in this task are as follows:

CriteriaRatings
Presentation / Use of Markdowns1.5/2
Compliance with topic1/2
Spelling and Grammar1/1
Quality of Analysis1.5/2
Originality2/2
#Club50501/1
Total8/10



Observations:
From the chart used in Question 3, the Risk to Reward used is 1:1. this is not advisable.

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Recommendation / Feedback:

  • The student have completed the assignment for this lesson.
  • The student also answered all the questions in his/her own words.
  • Your overall presentation is good. But you can improve by reducing image size.

Thank you for submitting your homework task.