Crypto Academy / Season 3 / Week 8 - Homework Post for @yohan2on | Risk Management in Trading

QUESTION 1:

ANSWER 1:

Buy Stop

A buy stop order is a order that is like a buy limit order which is always placed above the current price, The stop price is set at a level above the current market price, This order is usually placed when the market is already showing an upward movement.

The risk with buy stop orders is that a trader can set a price with can turn to be the highest price of the asset, that leave the trader in losses.

Lets see this by the help of chart and demo trading

Here we can see the resistance line at 49309.02 and the buy stop order is placed above the resistance line as well as above the current market price.

Here we can see I use paper trading which is a demo trading account over trading view to demonstrate the placing of a buy stop order, here we can see I placed a buy stop order with for 100 tokens at price 49451.96.

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Sell stop

A sell stop order is a order that is like a limit order which is always placed below the current market price, The stop price is set at a level below the current market price.

The risk with sell stop order is that it might not be profitable because it can get triggered due to a fakeout.

Lets see this by the help of chart and demo trading

Here we can see the support line at 49035.49 and the buy stop order is placed below the support line as well as below the current market price.

Here we can see I use paper trading which is a demo trading account over trading view to demonstrate the placing of a sell stop order, here we can see I placed a sell stop order with for 100 tokens at price 48846.78.

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Buy limit

A buy limit order is an order which is used to purchase an asset at a specific price point whether is is above or below the current market price, When the price reaches the limit price the order get triggered and the trader will enter the market.

Lets see this by the help of demo trading

Here I placed buy limit order using using the demo trading on trading view, once the price reach 49008.02 then the order will get triggered.

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Sell limit

A sell limit order is an order which is used to sell an asset at a specific price point whether it is above or below the current market price, when the price reaches the limit price the order get triggered and the trader will exit the market.

Here I placed sell limit order using using the demo trading on trading view, once the price reach 49132.68 then the order will get triggered.

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Trailing stop loss

Trailing Stop loss is different from normal traditional stop loss. In normal stop loss the price at stop loss is fixed and can hit anytime when market moves towards the stop loss. In trailing stop loss the stop loss is not fix to a price value but set to a percentage value. If we take a trade and then put a trailing stop loss, and in the same time market move upward then the trailing stop loss will also move upward with the price. But when the price will move down again the trailing stop loss fix itself to a position where it reach with the price when prices in Uptrend. And if price still move down trend then it will penetrate the stop loss and our order get complete.

^Source

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Margin Call

When a trader in market have insufficient funds then they can borrow few funds from there broker. These funds are added in traders margin account and money used in market is known as margin trading. We can buy as many asset as we want till we reach the minimum limit of funds set by broker. If we reach that limit then broker will give us a margin call.

Margin call occur when funds in your margin account reach up to minimum limit set by broker.

^Source

Let us take an example to make our margin call more clear.

Suppose we buy certain asset in market of ₹100,000. For this we borrow ₹50,000 from broker that is referred as equity. And ₹50,000 cash that we have.

So in total we take 0.50% of equity from the broker. Now this equity level will rise and fall according to your performance in the market.

If your equity in margin account fall from 0.50% to below then broker will give you margin call. So you have to make your account to touch that level again or else broker will sell few of your assets you buy and make there minimum level or margin account fix again.

This is what a margin call is in margin trading.

QUESTION 2:

ANSWER 2:

Risk management is very important for a trader to keep in mind, It help a trader to cut down his losses or we can say minimize losses because it is ideally impossible to totally cut down losses because the market is totally unpredictable for anyone, While trading we invest a large amount of money that is eventually put into risk so it become a crucial for a trader to apply some of his risk management techniques to stay away from large amount of losses, Let's discuss some of the risk management I can think of and I would prefer to apply:

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Using Stop loss order and take profit.

As we know that market is risky and totally unpredictable, It may fall or it may rise no one knows how the market will react in the future, As we enter the market the current market price may fall and eventually we suffer loss, so to minimize the loss we should add a stop loss so that below you market entry price, stop loss can be placed at a price at which the trader is agree to loose or he can use a support line to add a stop loss.

As it is important for a trader to add stop loss similarity it is important for a trader to add take profit because if a trader doesn't watching the market regularly then a market can reach a highest price and trader is not there to sell the asset to take the profit and if some how the market again fall and then eventually his stop loss will get triggered which is not good for a trader, so in short take profit is used to book the profit at a certain price.

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Using the risk reward ratio

As we know that take profit and stop loss are crucial for a trader to set if he is not watching the market regularly, So to know where to add stop loss and take profit, I recommend to use the 1:2 risk reward ratio.

Lets see this with the help of graph on trading view.

^{Using a 1:2 Risk:Reward Ratio}

In the above example we can see The entry point where we enter the market and we determine the Take Profit and Stop loss at a ratio of 2:1 means profit is double as compared to loss.

This is an example of using a proper buy trade with adding a take profit order as well as adding a stop loss order with a risk reward ratio of 1:2 for the above graph.

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Using the indicators to find the best entry and exit positions.

Through Steemit crypto academy I have learned about a bunch of indicator and strategies which can be applied to enter and exit the market,

Let's discuss some of those:

• Moving Averages

Moving average can be used to predict the market trend in advance, Golden cross and death cross are formed in the graph that tell the future price movement of the market.

Golden Cross : Golden cross is a situation when the moving average line set on 50 days before intersection is below the moving average line set on 200 days and after intersection the moving average line set on 50 days is above the moving average line set on 200 days, From this situation we can conclude that after the intersection of both moving average lines the price of the asset will increase or we can say it will show a bullish trend/ bull run.

Death Cross : Death cross is a situation when the moving average line set on 50 Days before intersection is above the moving average line set on 200 Days and after intersection the moving average line set on 50 days is below the moving average line set on 200 days, From this situation we can conclude that after the intersection of both moving average lines the price of the asset is more likely of fall or we can say it will show a bearish trend/bear run.

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• CCI

Whenever CCI value is above +100 it indicated that the asset is overbought at that time and if the value of CCI is below -100 It indicates that asset is oversold.

^{overbought region}

^{Oversold region}

Entry Strategy.

To find a best entry point I will wait for the formation of golden cross as well as when the CCI is just came from its oversold zone or it's value is around the oversold zone( value around -100).

Exit Strategy.

To find a best entry point I will wait for the formation of death as well as when the CCI is just came from its overbought zone or it's value is around the overbought zone ( value around +100).

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• RSI

RSI indicates the momentum in the price, Its value remains between 0-100.

The zone in between 0-50 is considered as bearish zone and the 50-100 is considered as bullish zone. If the RSI value is above 70 then it is considered that the asset is overbought and if the RSI value is below 30 then it is considered that the asset is oversold, If value rise above 80 it is considered as extreme overbought and id the value is below 20 it is considered as extreme oversold, When the value of RSI is around 50 then the market moves sideways.

^{Oversold and overbought region}

Entry Strategy.

To find a best entry point I will wait for the formation of golden cross as well as when the RSI is just came from its oversold zone or it's value is around the oversold zone (value around 30).

Exit Strategy.

To find a best entry point I will wait for the formation of death as well as when the CCI is just came from its overbought zone or it's value is around the overbought zone ( value around 70).

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• ADX with DMI lines

ADX indicates the strength of the trend but not the direction so that's why we are using ADX with DMI, DMI which is consist of DI+ and DI- lines, let's see what these line signifies.

Entry Strategy

When DI+ line crosses DI- and after intersection the DI+ is over DI- and ADX value is above 25 means the trend is likely to follow uptrend as well with a strong strength

Exit Strategy

When DI+ line crosses DI- and after intersection the DI- is over DI+ and ADX value is above 25 means the trend is likely to follow downtrend as well with a strong strength.

Conclusion

While doing this homework task I go through a bunch of terminology and discussed various of risk management techniques and about few indicators and strategies.

• A buy stop order is a order that is placed above the market current price like a limit order, whenever market reaches that price order get executed.

• A sell stop order is a order that is placed below the market current market price like a limit order, whenever market reaches that price order get executed.

• A buy limit is a buy order that is placed in advance at a certain price point, whenever price reaches at that point the buy order get executed.

• A sell limit is sell order that is placed in advance at a certain price point, whenever price reaches at that point the sell order get executed.

• In trailing stop loss the stop loss is not fix to a price value but set to a percentage value. If we take a trade and then put a trailing stop loss, and in the same time market move upward then the trailing stop loss will also move upward with the price.

• When a trader in market have insufficient funds then they can borrow few funds from there broker. These funds are added in traders margin account and money used in market is known as margin trading. Margin call occur when funds in your margin account reach up to minimum limit set by broker.

• Stop loss and take profit orders can be used while entering or exiting the market to manage the risk of looing the money in the market, these stop loss and take profit orders can be places at a risk reward ratio of 1:2.

• Indicators should be used while entering and exiting the market such as moving indicators, RSI, CCI, ADX, DMI,etc.

• Strategies should be used while entering and exiting the market such as golden cross, death cross, oversold, overbought, positive crossover, negative crossover, etc.

Thank You