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

Good day steemians and happy new year, This is season 5 week 7 and I'll be doing the beginners task assigned by crypto professor @reminiscence01

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.

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

Risk management is an important term in the crypto space which is aimed at protecting the capital of traders and investors when trading financial instruments. It includes a couple of strategies and technique adopted during trading to mitigate losses and reduce the risk exposure in trading.
As the crypto sphere continues to evolve and grow sporadically, it is very important to know that it's not only about profits, the risk factor in trading should not be ignored. Trading without risk management is likened to playing a game of gamble with assets as the risk which might occur from trading is not well managed and this is the number one reason for many blown accounts on the part of beginner traders.

Risk management practices stem from the use of stop losses, take profits, determination of risk per trade, and setting favourable risk to reward ratios to ensure effective management of account, adoption of the 1% rule trading strategy etc. When these risk management strategies are properly followed, the loss encountered during trading would be relatively lesser than that of an account with no risk management strategy.

Some of the importance of risk management include:

• Effective risk management practices helps to cut down losses - The crypto sphere is known to be very volatile and risk management practices when trading helps to mitigate losses

• Preservation of capital - This is the main purpose of risk management practices. Most traders without good risk management strategies find out that they're maintaining a losing account despite their higher win ratios in trading. Risk management helps to protect traders from losing all their capital in the event when losses are suffered when trading.

• Improved trading experience - When the amount risked per trade is maintained at a constant ratio of the total trade amount (i.e 2%), the anxiety associated with losing trades with high risks is completely removed.

• profitability in the long run - When risk management policies are effectively adopted and adhered to, trading becomes favourable i.e in a situation whereby a trader constantly risks 2% of his account and a risk/reward ratio 1:2, if only 40% of trade taken were won the trader would still end up profitable. (this is explained in risk-reward below).
  

  
  
  
  

  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.

1% rule
The one percent rule or 1% rule is a very popular risk management practice followed by a lot of traders. The idea behind this strategy is for traders to never risk more than 1% of their trading capital in a trade. Although this rule was eventually tweaked to risk no more than 2-3%, the ideology behind it remains the same.

This strategy helps to minimize risks with the possibility to maximize losses in the long term. This strategy is often followed by big investors or prop firm traders.

An illustration of the 1% rule when trading is given below
Considering a hypothetical situation involving two traders with a trading capital of $3000 in their accounts respectively.

Illustration A
Trader A, having an account worth $3000 employs and utilizes the 1% rule effectively and risks 2% for each trade. A total of seven trades were taken for the entire trading month of which four trades were won and three were lost.

Initial portfolio balance - $3000

Balance after fourlosses - (2%) - $60 × 4

Balance after 4 losses (2%) - $2,760

Balance after 3 Wins (2%) - $2,940

The portfolio of investor A after a total of seven trades which resulted in four losses and 3 wins for the month is 2940

Illustration b
Trader B having an account also worth $3000, doesn't adopt the 1% rule and in a bid to make more profits risks 10% per trade. A total of seven trades were taken for the entire month of which four trades were won and three were lost.

Initial portfolio balance - $3000

Balance after four losses - (10%) - $300 x 4

Balance after 4 losses (10%) - $1800

Balance after 3 Wins (10%) - $2,700

From the above scenario's we observe that investor A has managed to preserve more of his trading capital when compared with investor B.

However This calculation was done with the idea that they both maintained a 1:1 risk-reward ratio, a deeper analysis combining both the 1% rule and risk: reward ratio is given below

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Risk to Reward ratio
This is another important part of risk management and the base idea is that a good risk to reward ratio ensures that an investor can earn double or more of what he's willing to risk in the event of a winning trade. Therefore the minimum risk to reward ratio should be able to guarantee double the risk (1:2), this means the profit target will be twice the stop loss target.

A common practice is the adoption of the 1:3 risk-reward ratio which enables a trader to have a potential earning of three times what is being staked on a position. Using a risk-reward ratio of 1:1 or less is not a very good trading practice and will result in an account having negative balances in the long run.

An illustration of the risk to reward ratio is given below:
If an investor decides to use a risk-reward ratio of 1:3 on a $3000 trading account for every trade and takes a total of seven trades in the month which resulted in four losses and three wins.
The breakdown is given below.

Initial Balance -$3,000

Balance after 4 Losses (2%) using 1:3 RR - $60 × 4

Balance after 4 Losses (2%) using 1:3 RR - $2,760

Balance after 3 Wins (2%) using 1:3 RR - $60 × 3 for 1 position

Balance after 3 Wins (2%) using 1:3 RR - $180 × 3

Balance after 3 Wins (2%) using 1:3 RR - $3,300

We observe that despite having a lower win ratio, we were still left with a positive balance however using a risk-reward ratio of 1:1, in this case, would leave a negative balance as shown above.

c- Stoploss and Take-profit
These risk management strategies are ways to exit an open position in the market. They help traders execute exit trade orders either in a profit or loss.

Stop-loss is a price point or level at which a trader would choose to exit a trade and take on the loss in the situation where it becomes unprofitable and invalidates the trade setup. This helps traders prevent further losses on their accounts and minimizes drawdowns.
Take profit is the price at which a trader would choose to exit a profitable trade automatically. This is done at a point where additional upside in profits may result in risks, i.e price approaching a key support or resistance levels. For a good trade, the tale profit level is set in a higher ratio in comparison to the stop-loss levels.

These tools are very important to traders as it allows traders to take a break from the markets, whenever a trade has been set and the take profit and stop loss levels have been set, the order would be exited immediately the price approaches any of these levels and the profits or loss would be booked immediately.

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.

Trend reversal using market structure
The trend reversal trading strategy requires some criteria to be satisfied to validate trade entry as described in subsequent classes.
Criteria's required for using the trend reversal strategy is given below
Entry criteria

• A clearly defined trend must be established, the market should be creating higher highs and lows in an uptrend situation or lower lows and highs in a downtrend situation.
• A clear swing point should be formed
• Formation of a clear bullish or bearish candlestick breaking and closing above the previous high or low or resistance/support levels should be seen
• The buy/sell entry order should be placed after the candlestick closes above the previous high to below the previous low.

Consider the chart below

Buy trade DOT/USDT 1 DAY

From the chart above, its observed that price maintained a bearish trend with the formation of lower highs and lows thus the first criteria of a clear trend formation has been satisfied. Next, we observe that the bearish momentum diminished upon hitting a support level and at this point, a swing level was formed before price broke and closed above the resistance level which was the previous lower high point, and thus a reversal was imminent.

Risk using an $100 trading account
Using an $100 account and a risk of 2% per trade, which means I'm willing to risk $2 on each trade opened.

Trade Exit criteria

Stop loss
The stop loss will be placed below the new higher low point formed after the reversal and in order to maintain a positive risk to reward ratio. The stop loss ratio would be lesser than the take profit ratio.

Take profit
The take profit level should be set above the entry price and should be at least twice the amount a trader is willing to risk (stop-loss) to ensure positive rewards.

Illustrative trade example

The buy trade was executed at $27.33 with a risk-reward ratio of 1:2 and stop-loss placed beneath the previous zone. The take profit was set taking into consideration key liquidity levels. Necessary zones have been marked out and a potential zone that could cause a market reaction (previous support turned resistance zone) has been marked out and the take profit level has been set beneath the zone.

Executed Trade order

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2- Trend Continuation using Market Structure.

Taking trades using the trend continuation also requires that some criteria be satisfied and they are:

• The market should be in a clearly defined trend ( bullish or bearish trend)
• Wait for price to retrace and form a low point higher than a previous low in an uptrend and in a downtrend wait for price to retrace and form a high point lower than a previous high
• Once the above criteria have been satisfied then a trade should be executed with stop loss below the low point in an uptrend and above the high point in a downtrend.
  The trade should be initiated with a 1:2 risk-reward ratio.

Risk using an $100 trading account
Using an $100 account and a risk of 2% per trade, which means I'm willing to risk $2 on each trade opened.

Consider the chart below;

Sell trade SHIB/USDT 4 hr

From the chart above, price maintained a bearish trend by forming lower highs and lows, and then price retraced to form a high point lower than the previous high. A sell position was opened upon retest from below with the formation of a bearish engulfing candlestick indicating trend continuation.
The sell position was executed with stop loss above the newly formed resistance and take profit in the ratio 1:2. The trade is still ongoing

Executed Trade

Conclusion
Risk management is an important aspect when it comes to trading and the use of stop loss and take profit as well as sticking to a fixed percentage of risk per trade all helps to secure traders capital and safeguard profits in the long run.
The crypto professor has done an excellent job of enlightening the students about risk management. Thanks to the steemit team for the crypto academy, It's done far much in helping me tackle the markets one indicator/strategy at a time.

_{Alll images used in this post were gotten from trading view unless otherwise stated}