INTRODUCTION

This is the first day of the year, and its a privilege to participate in this class and perform the given task.
I appreciate you prof. @reminiscence01 for the wonderful teaching.
Without wasting much time, I'll like to perform the given task below.

HOME WORK

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.

Question 1

Risk management is a trading system which is part of our trading strategy that helps us put our trading activities on check; when we follow our risk management system we hardly fall for the emotional parts of trading, also risk management increases our chances of success since it help us keep and protect our profits.

The inability to manage losses is one of the worst pitfalls in crypto trading. Newbies are frightened when an exacerbating loss starts annihilating profits of many good trades. It’s a universal human propensity to take profits quickly but wait for losing trades to come back to even. The monent the desperate amateur gives up hope and closes his trade with an awful loss, his account is badly and sometimes irreversibly damaged. Risk management saves our trading account from situations like this, since we know how much we are willing to loose and what are target for that opened position is.

Importance of risk management.

1. Prevent massive loss or loss of trader's account: risk management saves the trader's account from being wiped when the market goes against his prediction.

2. It helps the trader build confidence: when a trader uses a perfect risk management strategy, he is not scared because he is willing to loose the percent of the account he is risking. The stop loss and take profit exit criteria provides a landmark to this risk.

3. High tendency of making more profit: With the 1% rule and the 1:2 risk reward ratio, traders have the potential to make more profit in every good trade.

4. Loss reduction: on the other hand, the more profit made as a result of the 1% rule and the 1:2 risk reward ratio, reduces the amount of losses made.

Question 2a

The 1% rule is a tool that is part of the risk management system where the trader don't risk more than 1% of his entire trading account (capital) on each position that he/she opens.

Take for instance, if your trading capital is $1000 and the risk you are willing to take is 1%, this means that in every position, you will be risking 1% of $1000.

= 1% * $1000

= 1/100 * $1000

= 0.01 * $1000

= $10

From the above illustration, you can see that for every trade opened applying the 1% rule, you're risking just $10 which implies that if you opens one trade and loss you're still left with $1000 -$10 =$990. This risk did not affect your account as you still have a reasonable amount to trade with.

Question 2b

Risk to reward ratio is a risk management tool that communicates our suppose profit in ratio as compared to our risk if the trade goes our desired direction. For example 1:2 means that the trader is risking 1 to make 2.

So, what ratio should we set as the Risk- Reward ratio. It is ideal to use at least 1:2 Risk - Reward ratio and at most 1:3 risk-reward as it seem to be the best for trading because our profit is meant to be higher than our risk, that will make a good trade

For instance - let's say I opened a position of $20 trade amount. So, It will be better if I will set reward profit level to $40-$60 to make a perfect trade.

Question 2c

Stop loss and take profit, this risk management tool is also an exit strategy. The stop loss exit a losing trade when it gets to our pre-set limit, while the take profit.

Stop loss and take profit orders are known as exit orders. They are place in a trade to manage risk. As traders, we all know that once a trade has been opened, such a trade can either move in an bullish direction or in a bearish direction, which might go against our prediction. Traders make use of the Stop loss and take profit to close their trade and take profit or remit loss immediately the trade has been closed.

Let's take for instance, where a trade is open at 1.12 with a stop loss set below the open price at 1.08, and take profit at 1.16 with a risk reward ratio that is set at 1:2. In this trade, the trader placed the trade in his favor, as soon as the trade closes, his profit is redeemed asap.

Question 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

In this part of this task, I will be explaining two demo trades placed using reversal and trend continuation of the market structure to show how much I understand the risk management.

Trend Reversal Using market structure
LUNAUSD
For the trend reversal, I will be using the chart of LUNAUSD.
So, I will be discussing the entry and exit criteria for making this trade.

Entry Criteria

The first thing to look out for is the time when the price fails to create a new high. In the illustration below, you will notice that price movement created higher highs and higher lows, then it failed to create a new high and then there was a break out in the previous low.
After the break of market structure, we wait for a retest the broke level, which will serve as a new resistance. Upon retesting the level, we then enter the trade when an engulfing candle, bearish forms to the downside. See the picture below.

Exit Criteria

Stop loss have to be placed above the new resistance level or zone. That's SL can be placed directly above the zone that got broken also known as the new resistance zone.
Take profit should be double of the stop loss. I.e TP should be placed to have a risk reward of 1:2. Moreover, if the nearest support zone is very close that it's lesser than 1:2, then that support zone should be used as the first target and 1:2 as the second target.

Calculating the Risk reward ratio to determine the stop loss and take profit.

This depends on your trading capital and the amount or percentage you are willing to risk per trade. For this task, I have opened a demo account which is$10, 000. See the screenshot below.

Screenshot from MT4 App

For this account, I am willing to risk just 1% of this account on each of the position I take in the market. This means that I will be risking $100 per trade
1/100 × $10, 000
0.01 × 10,000
= $100

Placing a sell entry at 96.34 and stop loss was placed at 97.34 and take profit at 94.34. This implies that I have about 100 pips for my trade to risk. If the trade goes against me, I will lose 100 pips but if it goes my way I earn 200 pips.
SL= 100pips
TP = 200 pips

Now, I used 0.1 lotsize.
So, the formula for calculating the profit/loss is given below.

Profit/loss =lotsize × pips gained/lost ×10
10 being constant.

Loss = 0.1 × 100 × 10
Loss = $100

Profit = 0.1 × 200 × 10
Profit = $200

In essence, this implies that if the trade goes against me, I will lose $100 and if it goes in my way, I will gain $200.

Placing the stop loss and take profit

Immediately I saw the price retested the broken level or zone, and a formation of a bearish candle to the downside, I placed the entry at 96.34 and the stop loss above the new resistance zone at 97.34 and the take profit at 94.34 making a risk reward of 1:2.

Trend Continuation Using market structure

SOLUSD

For the second part of this practical question, the demo trade, I will be placing a buy demo trade on the SOLUSD chart.
I will explain the entry and exit criteria for the trade,and also calculate the risk to reward ratio to determine the profit and loss for the trade so as to place a perfect stop loss and profit for the trade.

Entry Criteria

First and foremost the market trend is determined. I.e we must be sure if the market is an uptrend or a downtrend. In this case, I'll like to place a buy order, so, I need to see the market creating higher highs and higher lows which was what SOLUSD was created.

Since I want to join the trend, I would need to wait for price to pull back and create a low higher that is lower than the previous higher low.

And then, a buy entry should be made when the bullish engulfing candlestick pattern form upwards.

Exit criteria

The stop loss and take profit should be placed to give a risk to reward ratio of 1:2

Calculating the Risk reward ratio to determine the stop loss and take profit.

This also depends on your trading capital and the amount or percentage you are willing to risk per trade. For this trade, I will use a demo account which is$10, 000 I used above for the first trade.

Screenshot from MT4 App
For this trade, I considered risking just 2% of this account on each of the position I take in the market. This means that I will be risking $100 per trade
2/100 × $10, 000
0.02 × 10,000
= $200

So, I made a sell entry at 202.24 and stop loss was placed at 200.08 and take profit at 206.10. This implies, I have about 200 pips for my trade to risk. If the trade goes against me, I will lose 200 pips but if the trade goes in my favour I'll earn 400 pips.
SL= 200pips
TP = 400 pips

Using 0.1 lot size.
Applying the formula for calculating the profit/loss as given below.

Profit/loss =lotsize × pips gained/lost ×10
10 being constant.

Loss = 0.1 × 200 × 10
Loss = $200

Profit = 0.1 × 400 × 10
Profit = $400

This implies that, if the trade goes against me, I will lose $200 and if it goes according to my prediction, I will gain $400, which is fair enough.

Placing the stop loss and take profit.

Immediately I saw the break in price of the new high, and coming back to retest it for continuation, I'll wait to see what price action will do. On getting to the point, the price supported the level by forming an engulfing candle upwards.
So, I placed a buy entry at 202.23 and the stop loss below the low created at 200.08 and the take profit at 206.10 making a risk reward of 1:2

N.B : screenshots used in performing this task were gotten from meta trader 4 and edited by me using corel draw.

CONCLUSION

I appreciate you prof. for this teaching, it was a long teaching but it worth it and I must say do have a favourable year ahead.