Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 1: Principles of financial trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 2: Principles of Financial Planning and Cash Flow in Financial Trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 3: Understanding financial trading techniques

INTRODUCTION

INTRODUCTION

You will be learning about the basics of running your own business here, it serves to teach you the importance in having a risk/reward strategy that maximises your trading account. Furthermore, we highlight the importance of money management and how to increase your chances of success by following some simple rules and procedures.

Financial management is a key element in trading for both individuals and institutions that are active in the markets particularly during times of volatility. In short it is the ability to manage traded funds so that you can continue with the business of trading, limit losses and set targets. The ability to manage traded funds and capital generally will produce a measure of your performance in the markets so it is key that you understand the different methods and terminology used for managing trades. Alternatively, money management and risk will also identify whether you have enough money to continue trading and or whether you can limit losses on existing trades.

Risk

Many professional traders will state that risk and money management are the key factors to determine whether you will fail or succeed and it should be viewed as a positive aspect of your trading mentality (even when things go wrong!). The ability to effectively manage money with a sound strategy will certainly be the cornerstone of any traders tool box. In essence trading is a means to an end and therefore it is important not to get too carried away with the notion of making money as a singular objective which new traders often do, but rather think of money management as NOT only making profits but also managing losses. If you don’t manage your losses, it’s obvious that you are not going to be trading very long if you have limited capital to trade. So get it in your mind that trading is also about capital preservation and not just appreciation! No trader is expected or realistically trades with a view that every trade they make is going to be a winner, often they accept risk as part and parcel of the job and will have predetermined the profit and loss on any given trade before they make it! By using this skill many traders will avoid catastrophic losses, so whilst it is important to accept that you are going to have losses, but also need to remember that you can control them so that you have enough capital to trade another day… No one wants to be a one hit wonder so why risk all your capital on one trade?

Sound money management is the acceptance and realisation that every time you trade you are using capital/money to do so and this can be calculated as a percentage i.e. if you have £1,000.00 trading capital and you place a position on worth £10.00 you are effectively trading 1% of your capital, if you lose another £90.00 on the trade you have just lost 10% of your trading capital. If you can’t effectively use the tools in trading at your disposal you might as well gamble, which traders are not! Good traders make calculated decisions for optimising investment growth!

Financial Management

Given that individuals and institutions want to make money, it is fair to assume that boundaries must be put in place so that the money is managed effectively and this will involve research about what products are fit for purpose i.e. some markets are more volatile and considered risky, therefore, may not suit every trader, investor or the initial capital being used to trade. Proper analysis is also important when trading and these include economic factors and technical analysis which is covered in this course. Once appropriate research is undertaken and traders are ready to make a trade, it is at this point when you can use money management tools to preserve and potentially appreciate capital. Using charts or predicting changes in economic factors that will affect markets will give a trader the ability to assess two objectives before entering the trade – Where is my target (profit) and where it is sensible to prove that the trade is wrong and exit the trade if it’s not going as expected (loss). This is a simple view yet obviously other factors might affect risk dependant on what type of trade you have on i.e. spread, outright and the timescale of the trade you make, for example is it a long term, or short term trade.

Lastly, in this section we are going to cover common terminology and explain the core concepts when it comes to how money is held in account and what affects the usage of that money for the purpose of trading.

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