Crypto Academy Season 3: Week 8 – Risk Management in Trading – by @yohan2on

Question No. 1 - Define the Following Trading Terminologies: Buy stop, Sell stop, Buy limit, Sell limit, Trailing stop loss, Margin call

Buy Stop Order

A buy stop is simply a type of buy order trading that allows a trader to set a trigger condition that only buys a specific cryptocurrency at a particular price point that is higher than the market price. Once the condition is met, it would trigger the buy order to be filled. In normal sense, it is not possible for a trader to buy a cryptocurrency above the market price because exchanges have a system that automatically fills orders with the best price. With a buy stop, anyone can buy a coin at higher price than the market price.

The logic behind this type of order is that, at the market price, the price of that coin could fall and the trader would be at a loss. This is the benefit of a buy stop order because when the price of that cryptocurrency increases and triggers the buy stop condition, it means that there is an upward momentum going on and there is a higher probability that the price would increase higher than the entry price, which means that the trader would be in profit and continue to increase profit if the price continues in that upward direction.

Sell Stop Order

A sell stop is simply a type of stop loss order trading that allows a trader to set a trigger condition that only sells a specific cryptocurrency at a particular price point that is lower than the entry price. Once the condition is met, it would trigger the sell stop order to be filled. In normal sense, no trader wants to sell at a lower price than the entry. However, sell stop is used as a risk management strategy to help limit the loss in trading. With a sell stop, a trader can buy a coin at a certain price and set the sell stop lower than the entry price, so that if the price starts dropping after buying, the trader would only lose a small fraction of the capital depending on the sell stop position.

The logic behind this type of order is that, at the entry price, the trader has forecasted that the price would increase. However, since nothing is certain in the crypto space, the trader is smart and wants to protect his capital so as not to lose everything if the price starts dropping lower and lower. This would trigger the sell stop order. The trader would only lose a small percentage of the capital and have some capital left for another trading.

Buy Limit Order

A buy limit order is a type pf buy order trading that allows a trader to only buy a coin at his own price that is lower than the market price. This is the most common type of buy order trading used by many levels of traders. Every trader wants to buy cheaper than the market price and sell higher than the buy price. This is the benefit of the buy limit order because a trader can set his own price lower than the market price and wait for a seller to fill the order. The order will be added to the order book and remain open until a seller fills the order. Because the trader puts his own buy price, there is no guarantee that the order would be filled especially if the price is way lower than what sellers are willing to sell. Traders use the buy limit when the market is fluctuating in order to capitalize on the up and down movement of the price.

Sell Limit Order

A sell limit order is just the contrast of a buy limit. It is a type of sell order trading that allows a trader to only sell a coin at his own price that is above than the buy price and market price. This is the most common type of sell order trading used by many levels of traders. The rule in trading is to buy low and sell high or buy high and sell higher. This is the benefit of the sell limit order because a trader can set his own sell price higher than the buy price and market price and wait for a buyer to fill the order. The order will be added to the order book and remain open until a buyer fills the order. Because the trader puts his own sell price, there is also no guarantee that the order would be filled especially if the price is way higher than what buyers are willing to buy. Traders use the sell limit order type when the market is fluctuating to make gains.

Trailing stop loss

A trailing stop loss is a stop loss that moves up in relation to the set distance to the market price when the price is increasing. The trailing stop loss is a risk management strategy. The logic behind using trailing stop loss is that, when the trader is already in profit, the trader would want to preserve profit. This is the benefit of the trailing stop loss because it will help protect the profit made while also allowing more profits to be made if the price continues to move in the upward direction. There is no end to the trailing stop loss and it will continue to follow the market price upwards until the trigger price is met. Smart traders set a trailing stop loss distance to give room for retracement but also not too big for big profit loss.

Margin call

A margin call only occurs for trader that are into margin trading. A margin call only occurs when the margin account balance is below the required level for the margin. The margin call would be made requesting for the trader to put in more deposits into the account to increase the funds to meet up with the requirements or risk getting liquidated of any of their positions. Margin call is not a favorable situation for traders and mostly happens when there is a huge loss.

Question No. 2 - Practically demonstrate your understanding of Risk management in Trading

As a trader, I always ensure that I focus more on risk management whenever i want to trade in any cryptocurrency asset.

Risk capital

Risk capital is a risk management strategy that I use whenever I want to go into any risky trade or risky investment I hope of high returns. Risky investments can yield very high returns in a short time especially in the cryptocurrency space. By risk capital, it means that I have set aside a certain amount of funds that I can afford to lose without worrying. This is important because when it comes to trading or investing, emotions can have a huge influence. Using risk capital to go into risky trade or investment, there will be less emotions and worry because I won’t mind losing the capital while chasing huge gains.

Stop Loss

Stop loss is a risk management strategy that I use ensure that my losses are as minimal as possible when I am trading. Cryptocurrency is very volatile which means that no matter how good the technical analysis is, the price can still go the opposite direction. Whether I am going long or short, I always ensure to set a stop loss and risk only a small percentage of my capital if the market goes the opposite direction.

Take Profit

Take profit is a risk management strategy that I use ensure that my profit is intact when I am trading. When setting up a trade, I always have a take profit position. The trade would automatically fill if my take profit price is triggered. However, sometimes the price does not end up reaching my take profit price but still make profit. If this happens, I sell off and take my profit out. This is very important to do because sometimes waiting for the take profit price to trigger might be risky and see the price drop and lose all the profit made already. For me, once there is a decent profit made, I always exit the trade.

Use a Moving averages trading strategy on any of the crypto trading charts to demonstrate your understanding of Risk management

HNT/USDT Chart

Using the 20 and 50 period moving average, I was able to determine my entry point, take profit point prices. The 2 moving average line is signaling that the market reversed into an uptrend. The short moving average line is above the long moving average line and also the price is above the moving average line which indicates a strong uptrend movement. The moving average line became a support for the price which was a good entry signal for me.