Best ways to efficiently manage your capital in F&O trading
Traders who are just starting off find F&Os to be the most profitable and exciting avenue for investing. This blog will list a few easy strategies that you can use to navigate the tricky terrains of F&Os while ensuring maximum returns on your capital.
Traders who are just starting their journeys in the market find futures and options (F&Os) to be the most profitable and exciting avenue for investing. As lucrative as it may seem, it has its flipside: risk. With an increase in work-from-home arrangements, newcomers have taken to trading with a lot of hope and aspiration. While trades worth less than INR 2,00,000 are deemed low capital, for most, that may be a significant sum.
Commodity options tend to be a bit more complex than the simple “puts” and “calls” that most new traders focus on. Does that overwhelm you? Well, you needn’t worry; we’ve got you covered. This blog will list a few easy strategies that you can use to navigate this tricky terrain while ensuring maximum returns on your capital.
Best practices for capital management during F&O trading
While the risks and rewards define your decisions while trading, here are seven things that you should factoring in for efficient capital management.
Comprehend position sizing
It is imperative to understand the concept of position sizing because, in comparison to stocks, options have a lifespan that is limited. Investing the entire capital would mean that they would be exhausted soon. Position sizing helps in spreading out the capital over different futures and options, thereby minimising loss.
Know when to exit
The chances of earning profit diminish while holding on to a trade for extended periods. The objective is to take part in breakout zones and ensure speedy exits from trades. Three days should be the upper limit for holding onto the trade, which becomes intraday in the case of the expiry week.
As is the case with any type of trade, it is essential to have a clear plan I F&O trading as well that spells out the targets and stops to minimise losses. There are several calculators that are available online which can help compute these vitals to have better trading strategies so that you can know how to put your capital to work.
Don’t follow the herd
Traders who are just entering the market find it attractive to pursue the directions and investments of the masses because they perceive them to be profitable avenues. However, your capital and the targets and risks you are willing to take may vary greatly from others. It’s your capital, so follow your strategy.
Use budgeting to avoid risks
The budget you allot for a particular trade should be indicative of the risk you are willing to take. Do not place a trade when you know the outcome is uncertain and the indicators hint at market reversals. When you trade in a volatile asset, it is no longer a trade, but turns into a gamble. Start small: measure the risks and then decide on directing a part of your capital to investments.
Stop loss is your friend
The idea of big returns may be attractive, but the market isn’t always going to act in your favour. Stop loss will help you keep small losses from becoming big ones. Once the price nears the low of the last market, the stop loss will execute a sell and minimise losses. Also, a trailing stop loss may be used to execute a sale when the price reaches a point where a reversal is anticipated. In either case, stop loss is your best friend. The more conservative, the better.
Stay informed about the trends
The emphasis over here is to be aware of the trends and market movements, not to ride on them. Your own analysis after referring to blogs, journals, and expert opinions should help to see how the market is shaping up, and what your take on it should be. In fact, online courses and books will help you to analyse the market and manage your capital while dealing in F&Os.
Wrapping up: Key points to remember
Most new investors feel that they can make more profits by pumping in more capital. But that isn’t true. It takes planning, strategy, and patience.
- Avoid trades that are nearing their expiration date
- Think big, act small
- Always diversify
- When in doubt, hold out
- Use stop loss
- Don’t overshoot your budget
For beginners, the initial efforts should be directed at understanding how investments in F&Os are effectively planned to help preserve and grow capital. With a little help from the right sources, you should be up and running in no time.