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

What I understood by "Risk Management"?

What is the importance of risk management in Crypto Trading?
Risk management can be said to be the various strategies and tools which can be put forward so as to ensure a profitable or prosperous trade and also to reduce the occurrence of losses. In the crypto world, various strategies can be put forth to avoid losses and also to be able to manage trading processes, this type of method is known as risk management.

The importances of risk management in crypto trading

• Risk management enables a trader to know when to make market entries this is one of the reasons it is important.
• It as enables a trader to make the right decisions and serve as a means of minimizing losses and maximizing profits.
• It makes a trader to know when to enter a trade and when to back out from a trade.
• Its tools, such as the Stoploss & Takeprofit makes a trader aim at a successful market entry because the losses are minimised and the profits are maximized with the use of these tool.

Explain the following Risk Management tools and give an illustrative example of each of them.

1% Rule

During an ongoing trade, there is a limit to the amount of risk a trader is allowed to take during each trade. This is known as the 1% rule. This is a form of strategy used to minimize or reduce the occurrence of daily trade losses. It is a form of risk management. How this works is that, for instance:

A trader has about $2000 and decides to risk about 1-2% of his money with 3 entry positions.
I.e: $40 × 3 = $120
Assuming he made 4 losses in a row;
$120 × 4 = $480
Account balance = $2000 - $480 = $1520

Using the example above, the trader made 4 losses in a row. The total loss made was $480 and the account balance left was $1520. Now this strategy had helped the trader to conserve some of his resources because the balance can later be used in another trade to make up for the losses incurred.

Risk Reward Ratio

This is another type of risk management tool which is very important. It aims at enlighten the trader to know the position of his takeprofit or stoploss.
For instance, if the risk-reward ratio is 1:3 it means that for every loss incurred, the profit target will always be thrice of it. That is, if a trader makes an entry and incurr a loss of $20 since the risk reward ratio is 1:3 it means that the trader's profit aim should be $60. This is the importance of this risk management tool (risk reward ratio). It is a very important management tool and it is used by many traders so as to efficiently manage their daily trade activities.

Stoploss and Takeprofit

On the other hand, stoploss & takeprofit are also risk management tools. The help a trader to make decisions during tade activities. When venturing into a trade, it is best that the trader acknowledges that in a trade either a profit or a loss is bound to happen and so as a means of reducing the loss which might be incurred or gain which might be gotten, the trader uses the stoploss & takeprofit risk management tool.
Stoploss is a type of exit trade order which helps in loss reduction by closing a trade when it is going in a loss. That is, once the order is set during a target loss the trade closes automatically. This is the importance of a stoploss as a risk management tool.
Takeprofit is a type of management tool in which a trader sets a target profit. Once this profit is met, the profit at that point in time is taken so as not to incur losses then the trader can wait for the next market entry.
Before setting a stoploss, the trader must ensure that he or she is willing and able to bear the loss of that money and also ensure that the takeprofit is always twice the stoploss or thrice (as the trader insists).