Steemit Crypto Academy Season 5 Week 7 [Beginner's Course] - Risk Management and Trade Criteria.

in hive-108451 •  5 months ago  (edited)


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Image edited in Canva

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Hello Steemians, I welcome you all to the 7th week of Season 5 in the Steemit Crypto Academy. This is my last lesson for the season as I introduce you to the most important aspect of investing in the crypto market which is Risk Management.

In the previous lessons, we have mainly focused on technical analysis tools and how we can make good trading decisions using them. Similarly, some homework tasks require the students to analyze the market and open a demo trade based on the trading tools they learned. Some did perfectly well in executing the trade without actually considering risk management.

This is where trading is very simple but not easy because you have the buy and sell order at your fingertip to execute a position as long as you have an internet connection. But what makes trading difficult is the ability to manage risks and your emotions. In this study, we will only focus on risk management.

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Understanding Risk Management

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In the previous lessons, we have discussed different trading tools to determine market direction. That is not all you need to succeed in the market as a trader. The number of days you have spent or the number of strategies you have learned is not enough to be a successful trader. Even the most winning trading strategy can still lead to losses of trading capital if you fail to manage risk properly. Not managing your risk properly will end you up in losing streaks and might even blow your account up. Also, it will lead you into jumping from one trading strategy to another to look for a winning one. Like I said, even with the most profitable trading strategy, if you fail to manage risk, you will end up believing that the strategy doesn't work.

When we talk about risk management in trading, we refer to the tools and processes put together to have a successful trading journey with minimal losses. Losing is part of trading and every professional and profitable must have encountered a loss in trading. But when you manage your risk properly, your losses will be minimal and will not affect your trading capital.

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Risk Management Tools

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In this section, we will look at some of the common risk management tools in the market. Please pay attention to this section as you will always implement them in making a trading decision. Remember, trading is not only about strategies.

The 1% Rule

Have you ever witnessed making profits today and losing it all in the next trade? I was a victim of this until I got myself educated on risk management. Successful traders do not risk so much on a trade. They risk at least 1-3% of their entire trading capital on a position. Risking this little percent of your trading capital will save you from blowing up your account when you encounter a loss which is certain that you will encounter losses in the market.

Let's take for example, you have a $1000 account and you are meant to risk just 3% with 2 positions opened.

i.e $30 × 2 = $60
Let's assume that you 3 losses in a row,
$60 × 3 = -$180,
Account balance = $1000-180 = $820.

From the example above, we can see that even if the trader encountered 3 losses in a row, he still has enough trading capital to make up for his losses and take another opportunity in the market.

But when you risk so much like 10% with 2 positions opened, 3 losing trades will set your trading capital to -$600. And if you don't manage your emotions properly and jump back to recover your lost money, you will end up blowing your account. Trading is all about being disciplined and sticking to proper risk management.

The 1% rule will save your trading capital in the long run even during the worst trading days. Ensure you risk a portion of your capital on any position.

Risk Reward Ratio

This is another important risk management tool. A certain trade might go in profit and the next trade might take back the profit due to a poor risk-reward ratio. Risk reward ratio entails knowing the position of your stoploss and take profit. I normally recommend a 1:2 risk-reward ratio on any trade position. This means the profit target should be twice the stoploss target.

For example, let's assume you are risking $10 on a position, your profit target should be $20. Most novice traders open a position with 1:1 or even less than that. That is a bad way of trading in the crypto market. You don't need to chase the market as the market is open 24/7 for you to be patient and capture the right setups. If a trade setup is giving you a 1:1 risk-reward ratio or less, then that setup doesn't worth the risk.

Jumping into trades that don't meet your risk-reward ratio exposes you to over-trading and emotional trauma. When you have a good risk-reward ratio, it increases your winning ratio and still keeps you in profit even when you encounter losses in the market.

Take Profit and Stoploss

Take profit and Stoploss are two ways to exit an opened position automatically. Stoploss is an exit order that closes your trade at a loss when the market goes against your prediction. Similarly, a take profit position is an exit order that closes your trade at a profit when the market goes in your favor.

Before opening any trade position, you should have in that the trade might either go in profit or loss. Having this idea in the highly volatile crypto market necessitates the use of stoploss to protect our trading capital when things go wrong.

On the other hand, when the market goes in your favor, you need to take profit and wait for the next trading setup. You can't continue holding onto a position forever. Even if you do, the market changes trends and might come back to your entry or stoploss position.

Ensure that your stoploss is in accordance with how much you are willing to risk from that position and your take profit should be twice the stoploss. You can adjust your position size (lot size) to have a wider stoploss which will give your trade room to play out.

Strategic places to place stoploss and take profit include market structures, support and resistance areas, trend lines, moving averages, and channels. Some traders also make use of technical indicators like the Average true range( ATR) to set these targets.

Note: Stoploss and take profit positions must be determined before executing an order. This will give you confidence in your trade and also ascertain whether the trade setup is worth the risk.

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Trade Criteria for some common Trading Setups

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In the previous lessons, we have discussed several techniques to capitalize on the crypto market. Some placed demo trades using these techniques without understanding the criteria and risk management. In this section, we will look at different trading criteria and how to set stoplosss and take profit positions.

Trade Criteria for Trend Reversal Using Market Structure Break

We have discussed market structure formation and how we can make trading decisions using market structure. In this section, we will discuss trade criteria and what to look out for before executing a position using market structure.

For a Buy Opportunity

Entry Criteria

  • Ensure that price has failed to create a new low. Wait for price to reverse back up to break the previous high which confirms the break of market structure.
  • After the break of the market structure, wait for price to come back and retest this broken high to form a support. After the retest, execute a buy trade after a bullish engulfing candlestick. This can be seen on the chart below.


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Buy entry Criteria


Exit Criteria

  • For exit criteria, stoploss is placed below the new found support. The trade will be considered invalid if price comes back to the stoploss position.
  • For the take profit target, the nearest resistance can be used as a take profit at 1:2 R:R ratio. The next resistance is targeted as price might likely reverse at that point. Sometimes, the next resistance might not be twice your stoploss. You can use that as your first take profit and then 1:2 as your next target. An example can be seen in the screenshot below.


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Buy exit Criteria


For Sell Trade Opportunity

Entry Criteria

    • Ensure that price have failed to create a new high. Wait for price to reverse back down to break the previous low which confirms the break of market structure.
  • After the break of the market structure, wait for price to come back and retest this broken low to form a resistance. After the retest, execute a sell trade after a bearish engulfing candlestick. This can be seen on the chart below.


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Sell entry Criteria


Exit Criteria

  • For exit criteria, stoploss is placed above the new found resistance. The trade will be considered invalid if price comes back to the stoploss position.
  • For the take profit target, the nearest support can be used as a take profit at 1:2 R:R ratio. The next support level is targeted as price might likely reverse at that point. Sometimes, the next support might not be twice your stoploss. You can use that as your first take profit and then 1:2 as your next target. An example can be seen in the screenshot below.


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Sell exit Criteria


Trade Criteria for Trend Continuation Using Market Structure

For a trend continuation, we will deploy the same trading criteria utilized in trend reversal which is break and retest structure. But the following must be satisfied.

  • Ensure that the market is either trending up by creating higher highs and higher lows, or the market is either trending down by creating lower highs and lower lows.
  • For an uptrend, wait for price to retrace and form a low point higher than a previous low. Then take a buy trade as price reverse back up with a bullish engulfing candlestick. Stoploss should be below the low point with a 1:2 risk-reward ratio.
  • For a downtrend, wait for price to retrace and form a high point lower than the previous high. Then take a sell trade as price reverse back down with a bearish engulfing candlestick. Stoploss should be placed above the high point with a 1:2 risk-reward ratio.

I will illustrate Trade criteria for Trend continuation for a Sell trade in the screenshot below.


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Buy entry Criteria : Trend Continuation


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Buy exit Criteria : Trend Continuation

Note: The trading management and trading strategies discussed in this lesson serves as a guideline to help you in developing a trading system that suits your trading style. You can modify this trading strategy to your trading style while still maintaining good risk management. The study is for educational purposes and does not serve as financial advice.

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Conclusion

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Risk is management is one of the most important aspects of trading in the financial market. Risk Management doesn't protect you from losses, it builds your confidence in executing a trade and also helps you to avoid over-trading. Similarly, every trade setup needs to be executed if the trade criteria are met.

In this lesson, we have discussed some risk management and trade criteria for some trade setup. This information serves as a guide and basics to you in developing your own trading plan. Remember that, it is very risky to execute a position without having an exit plan. Ensure that a certain trade is worth the risk involved in it before execution. Do not chase the market as it is available 24/7 to capitalize on the next opportunity.

Thank you for being part of this lesson.

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Homework Task

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This homework requires you to deploy information from the previous lessons. Everything we have learned this season sums up in today's lesson and I will encourage you to spend quality time to understand the questions before you answer them. Good luck!

  1. What do you understand by "Risk Management"? What is the importance of risk management in Crypto Trading?.
  2. Explain the following Risk Management tools and give an illustrative example of each of them.
    a) 1% Rule.
    b) Risk-reward ratio.
    c) Stoploss and take profit.
  3. Open a demo account with $100 and place two demo trades on the following;(Original Screenshots on Crypto pair required).
    a) Trend Reversal using Market Structure.
    b) Trend Continuation using Market Structure.

The following are expected from the trade.

  • Explain the trade criteria.
  • Explain how much you are risking on the $100 account using the 1% rule.
  • Calculate the risk-reward ratio for the trade to determine stoploss and take profit positions.
  • Place your stoploss and take profit position using the exit criteria for market structure.

(Show demo account balance and proof of trade execution)

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Homework Guidelines

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  • Homework must be posted in the Steemit Crypto Academy community. Your homework title format should be " [Your Title] - Crypto Academy / S5W7- Homework Post for @reminiscence01".
  • Plagiarism is a great offense in Steemit Crypto Academy and it won’t be tolerated. Ensure you refrain from any form of plagiarism.
  • Your post should not contain less than 400 words.
  • All images, graphs, and screenshots from external sources should be fully referenced, and ensure to use watermark with your username on your screenshots.
  • Use the tag #reminiscence01-s5week7, #cryptoacademy, #club5050 if eligible and your country tag among the first five tags. Also include other relevant tags like #riskmanagement, #trading #cryptocurrency.
  • Only users who meet the requirements for #club5050 are eligible to participate in this homework task.
  • Homework task run from Sunday 00:00 December 26th, 2021 to Saturday 11:59 pm January 1st, 2022 UTC Time.
  • Only users with a minimum of 300 SP and having minimum reputation of 55 are eligible to perform this homework. Also, note that you must not be powering down.
  • Users who have used upvote tools to gain SP or build their reputation are not eligible for this homework.
  • To be eligible for #club5050, a user must have powered up 150 Steem in the last month.

Note: You can only drop your homework link in the comment section if not reviewed after 48 hours.

The comment section is freely opened for suggestions and feedback on the lesson and homework.
Cc: @steemitblog

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Thank you Prof. @reminiscence01 for the lecture.

Please my previous homework I submitted to Professor @sachin08 was not curated. It has expired and I have made a repost. Here is the link to my repost.

https://steemit.com/hive-108451/@sonia440/271fp6-trading-using-wedge-pattern-crypto-academy-s5w5-homework-post-for-sachin08
Thank you

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Good morning @reminiscence01 please my achievement task 10 had not been attended to
Please take a look at it and give me the appropriate grade for it. Here is the link: https://steemit.com/hive-108451/@raybaby/steemit-crypto-academy-season-4-beginner-s-course-task-10-candlestick-patterns

Exercise patience with the team. The professor in charge will grade your work.

Thank you professor @reminiscence01, pls my demo acct is about $9000 can i use that or it must be $100 exactly ?

You can work with that as long as you apply the necessary calculation for risk management tools.

  ·  5 months ago (edited)

Greetings professor @reminiscence01, thanks for the lesson sir.

“Explain how much you are risking on the $100 account using the 1% rule.”

Can one really use the 1% rule on a $100 account and place live trades??
I think that will be too small to place a trade with. Even to fund a futures wallet that won’t go well or maybe I’ve not understood what you are trying to express.

Secondly sir, these demo accounts come with an automatic account worth from what I know so far. Do we just apply the 1% rule on the trading amount the demo account has? That’s after doing the calculation on the normal $100 worth trading account and then we can now do the calculations for our demo account worth in order to be on track despite we don’t have exactly $100 demo account worth.
I’m hoping to hear from you sir, so that I can clear my doubts

You can apply the 1% rule on a $100 account. The size of the trade doesn't matter. You can look for a broker/exchange platform that will allow you chose an account size.

However, you can use any demo account size and apply the 1% rule if getting a $100 account will be a problem.

Thanks very much professor

Another question professor @reminiscence01, concerning question number 3... are we to place 2 trades on Trend Reversal using market structure and 2 trades on Trend continuation using market structure which totals 4 trades or we are to place 1 trade on trend reversal using market structure and 1 trade on trend continuation using market structure which totals 2 trade.

Pls sir I need clarification on this

That will be too much.Execute one trade for each.

Hello sir, concerned with question 2, the illustrative part, do we need to carry out with screenshots, or rather give a detailed example of each tool?

Give an illustrative example.

Ok sir

Thank you for the lecture, Prof. @reminiscence01.
Must the demo account be $100? I have a Demo Account with $100,000. Can I use it?

You can use that as long as you make your analysis based on that.

Professor thank you for this wonderful lecture and thanks for your efforts so far in all the studies, i really appreciate your efforts. I will be submitting my assignment soon.

Good morning prof
My last week assignment have been graded but not curated

https://steemit.com/hive-108451/@victoh78/confluence-trading-crypto-academy-s5w6-homework-post-for-reminiscence01

Dear professor @reminiscence01, please look into this

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You said “buy entry” for a downtrend chat?

I'm confused, please clarify...