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Tips for Getting Into Futures Trading

Tips for Getting Into Futures Trading

Futures are financial instruments traded in the dynamic derivative market. It is necessary to have a plan of action in order to navigate through it successfully just as we decide on our destination before we get into the car. Similarly, we must know our plan of action before we start trading in Futures. Here are a few tips to help you get started!

   1. Select an underlying

Future contracts are available on various underlyings such as stocks, indices, commodities, interest rates and currencies. However, in case of stocks, futures are available on only a fraction of the stocks listed on the Exchange. They are also available for indices such as Nifty 50 and Bank Nifty.

   2. Understand the factors that affect the movement of your underlying

Once you’ve selected the underlying whose future contracts you want to trade in, you need to understand the various factors that affect their price movement. This along with fundamental and technical analysis will help you to analyse when it is a good time to trade in that derivative. A particular future contract as you already know is available for trade for 3 months, so you need to take advantage of the opportunity presented.

    3. Clear entry and exit points

Once you have decided when and at what price you want to enter into a trade, it is of utmost importance to decide at what price you will exit it. 

There are 3 points at which you might exit the trade:

  • Target

Target refers to the price point that you want your stock or trade to reach, the point at which the trade will be profitable. Now this is subjective. It can move in share price like ₹10 or ₹20. It can even be a percentage profit like 1% or even at 5%. This depends on the trader.

  • Stop-loss

Stop-loss is a point at which you want to exit your position in a loss. This does not mean that you want to incur a loss, it simply means that you want to stop your loss from increasing beyond a certain limit.This is why ‘Stop-losses are lifesavers’. You are the best person to decide  what your stop loss should be based on your risk appetite. Like targets, stop-losses too can be either based on share price movement or percentages.

  • Duration

Duration refers to the amount of time you want to hold a position. Before you enter a position, you must decide whether it is an intraday position or positional trade i.e. if you will hold the position for more than a couple of days or weeks. This will give you clarity about when to exit this position.If the stock does not go up or down, you can use the duration as a factor to exit from the position. 

While this is very important for Futures traders, this is particularly important for option buyers as they hold their position for a long time, in the hope that there will be big movement in the stock and their option will become profitable.If there isn’t such a movement in your stock, you will keep losing the premium of your option on a daily basis because of time value.It is possible that this option might expire at zero.This is why it is important for you to decide Duration along with your Target and Stop Loss.

  •  Consider both long and short positions

Based on your market view, you can take both long and short positions in the Futures market. Now remember that unlike the cash segment, in the F&O segment, short positions can be carried forward. So remember that short selling is also an option, you don't have to take only long positions. 

To summarise: Ideally you want the price to reach your Target, the point you are able to book a profit. However things might not always work out in your favour, so it is equally necessary to set your stop loss. This will help you to exit the trade with minimum losses. It is possible that your underlying doesn't move much and has neither reached the target nor the stop loss. So in such a situation when you have decided in advance the maximum duration that you will hold the contract, it helps you to exit the position, so that you can use your funds elsewhere.

If you follow these tips, then you will be able to cut your losses and ride your profits!