While trading futures can be highly rewarding, it is considered to be riskier than trading in the cash market. If you are new to derivatives, the tips discussed in this post are sure to help.
Lack of capital is one of the biggest roadblocks for new traders. Due to unavailability of required capital, most traders are generally not able to trade in quantities that they would like to. Many of the traders struggling with this problem look up to stock futures as an effective solution.
In a way, trading futures allow you to buy a considerably higher number of shares at around 15%-20% of what you need to trade the same number of shares in the cash market. But while trading stock futures can be highly rewarding, it comes with a lot of risks too. If you are new to stock futures, here are a few tips that can help you succeed-
- Understand How a Futures Contract Works
Unlike the cash market, the futures market works based on contracts. You do not directly buy shares but contracts that come with a particular number of shares. For instance, 1 futures contract of Company B has 3,000 shares. Similarly, 1 futures contract of Company C has 1,200 shares.
The number of shares in a particular contract varies considerably based on the spot price of the share and is fixed by the stock exchange. To begin, try to understand the fundamentals of how these contracts work, including their expiry, span margin, and exposure margin.
- Work on a Trading Strategy
It is impossible to be a successful stock trader without a solid trading strategy. While you can use the tips and tricks from reliable online portals, once you get the basics right and have some trading experience, you should start creating your own trading strategy.
Only a customised strategy built around your trading style can work in the long run. Especially, in the case of trading futures where risks are high, a solid strategy with an effective exit plan is a must if you want to succeed.
- Stop-Loss is More Important than Ever
While stock futures allow you to purchase a higher number of shares at a lower margin, the losses would be higher too if a particular trade backfires. For instance, if you have purchased 1 futures contract of a company, your position would be minus (-) Rs, 3000 for 1 point the company futures contract falls.
This makes using stop-loss a must for everyone new in the futures segment. Know the risk-reward ratio and put a stop-loss at the time of placing your order. This is especially true for everyone who cannot stay active in the market throughout the trading hours.
- Practice with a Trade Simulator
You can now find several online trade simulators. These simulators are similar to a trading account with the only difference being that you do not use real money for trading. The simulators have a dummy trade setup, and you also receive virtual money for trading.
In the initial days of trading futures, it’d be wise if you try your trading strategies on a trade simulator. Many of them are also available on mobile phones to help you to practice anywhere and anytime during the trading hours.
- Pick a Reputed Broker
Derivative trading is an entirely different segment than trading in the cash market. When you open a trading account, you are required to submit additional documents like bank statements for activating F&O.
If you do not have a trading account, look for a reputed broker that can provide seamless access to future trading. The broker should have a top-notch online trading portal, software, and mobile app. Moreover, the official website of the broker should also keep you updated about the latest happenings in the market along with in-depth futures analysis.
Being a Successful Futures Trader
A large number of day traders trade in the derivatives market as it can be highly rewarding. But do not think of futures or derivatives trading as a quick way to make a lot of money. To succeed, you will need a lot of learning, dedication, patience, and years of practice.
If you are just starting, keep the tips mentioned above in mind as they will help you keep risks to minimum and increase the chances of success.