In the world of crypto, Everyone including experienced, inexperienced and professional traders are scared of one thing, which is making losses. The sole aim of Every investors is to maximize profit.,but due to unpredictable markets and other factors losses cannot be totally removed in the crypto market,but it can be brought to a minimum with the use of good trading tools as well as Risk management strategies. Special thanks to @yohan2on for the wonderful lecture. Below is my homework task.
Define the following Trading Terminologies
- Buy stop
- sell stop
- Buy limit
- sell limit
- Trailing stop loss
- margin call
(I will expect an illustration for each of the first 4 terminologies listed above in addition to your explanation)
This is a trading tool and it is usually set by a trader above the current value of an asset in the market. The buy stop is set to help instruct a trader when to buy a particular asset. When the specific price set for an asset reaches the stipulated amount, the asset will be bought. This buy stop is usually set by a trader in other to maximize profit when an asset price moves in the upward direction. Setting a buy stop can also help a trader minimize losses for a short time. Buy stop is also used by most technical analyst who usually depend on the support and resistance levels during trading. Technical analyst usually opens a buy stop above line of resistance so as to make more profits once there is a breakout.
To illustrate, if I want to buy a particular asset for $4 and its current price is $3, I will have to set my buy stop for $4 Once it gets to my stipulated amount, it will automatically buy.
It is usually set in an amount that is below the current value of a particular asset in the market. It is used during sells of an asset. A trader usually specifies the amount which is the stop price. Once an asset price moves in the direction of the stop price,then the asset will automatically sell.
To illustrate, if Mr Yohan2on had bought an asset worth $35 and does not want his loss to be greater than 5%, he will place a sell stop around $29.50. Once the price of that asset falls to $29.50 it will sell off.
This is used by a trader to buy an asset at a specific amount,which is below the price of the asset at that moment. When a buy limit is set, the trader is rest assured that he/she will buy at the specified amount or lesser. The buy limit order may likely not be possible if the price of the asset does not reach the limit price or moves very fast above the limit price. It is very useful in controlling cost but can result in missed opportunity during conditions where the price moves fast in the market.
Example: if I want to invest on 100tron and it's initial price is $4, I will set my buy limit of $2, after considering various factors. Once there is drop in value the buy limit will be carried out.
It is used to make trading easy, by selling at a very high and specific price,in a very short time. It is usually set above the price of the current market of an asset. The asset will be sold only if the price of the asset reaches the set sell limit. The sell limit helps to improve a persons psychology about trading,as a person will see the need to be patient. The sell limit is placed when a trader sees that a particular asset was oversold and perceives an uptrend in the price of an asset.
Trailing stop loss
It is a stop order that only moves in a specific direction,since they are set at a specific percentage which is usually below an asset's initial value at the moment. The best percentage to use when setting a trailing stop loss is between 15% to 20%. Trailing stop loss can be seen as a modification of the stop order.
Trailing stop loss is set in other to maximize profit by allowing a trade to remain open as long as the asset price is moving in the direction of the trader, and then the trade is closed when the value of the asset moves in an opposite direction at a specified percentage. It reduces losses and locks profits especially when the trade is in a favourable direction.
Example: if I enter a trade with $400 and I place a trailing stop loss order of 5%, if the market moves against the trailing stop loss I had set (5%), the trade will stop.
The margin call occurs or serves to notify the trader that he/she is low in funds in their margin account. When the margin call notification occurs, the trader is expected to fund their margin account or sell off some assets in other to fund their account.
The margin account of a trader is made up assets acquired with borrowed cash,which is made up of his own cash and cash collected from a broker. when there is low fund in the account usually because of a trading loss, the trader is notified by his broker and is expected to fund his/her account so as to raise it to the minimum required value which is called maintenance margin. Percentage of margin maintenance determines the value of margin call.
Answer to Question 2
Risk could be referred to an activity that happens, which is not actually what we planned for or expected. Risk can never be unexpected in cryptocurrency. Not all trades in crypto is expected to produce profit all the time,sometimes losses do occur. In crypto, a trader is not expected to use all his life investment. Risk management involves identifying, assessing and being able to put into considerations various threats and factors that could lead to losses before going into a trade,and then try as much as possible to reduce them to the nearest minimum.
Some of those factors to put into considerations include;
• Trading plan
For any individual to be successful in life, the person needs to set goals either long term or short term goals. For any trade to have a successful trade,the trader needs to plan. A traders plan should cover the traders reason for trading, goals, attitude towards risk, available capital,strategies to use and how he/she will be able to manage risk when it occurs. A trading plan should be made in such a way that it will favor the traders financial situation and personality.
• stop loss and take profit
It is all about the percentage of loss a trader is willing and can bear, while take profit deals with the percentage of profit a trader wants during a trade. For a trader to be able to use this tool, the trader needs to carefully learn about technical analysis. The trader needs to study numerous charts of various assets, use different formulas to calculate when the peak price of a cryptocurrency pair will be reached and also when it will decrease.
• Risk/Reward Ratio
Traders manage their risk of loss and capital by using the risk and reward ratio. The Risk ratio reward should be greater than 1:3. The risk ratio tends to calculate the difference when a trade is entered and the set stop loss as well as during a sell or take a profit order.
• Risk percentage:
This involves using any specific percentage rule with other management strategies to help save a traders capital. Most traders are only willing to 1.5 or 3% of their capital.
use a moving Average trading strategy on any of the crypto trading charts to demonstrate your understanding of Risk management.(screenshots needed)
I noticed that the market was moving in a bearish trend,so I set my buy stop order,as this is the best time to buy and I will sell it when there is a bullish trend. I had to apply the moving average strategy too. In other to help me manage my risk level,i set my buy stop order,I set my stop loss order in case the market tend to reverse against my order and I also set my take profit as this will keep my profit intact when the market tends to reach the take profit order.
Risk management has helped to boost the confidence of most traders as traders are rest assured that they can easily control their losses in other to maximize profit,and this actually depends on the appetite of the trader and the percentage of capital they can easily let go on a trade.