Futures contracts are undoubtedly among the most popular and exciting ways to invest your money in the stock markets. For the unaware, it can be quite risky but for the well-informed, futures trading can prove to be rather beneficial. In India, the most popular futures contract that is traded on the exchanges is the Nifty Future. In fact, it is one of the top futures contracts traded in the world.
In case you are unfamiliar with a futures contract, all you have to know is that it is essentially an agreement between a buyer and a seller to buy or sell an asset – commodity or security – at a predetermined price at a specified date in the future. It is important to note that a futures contract derives its value from its underlying asset. For instance, a futures gold contract will derive its value from gold.
To understand futures contract better, consider the following example – a trader ‘X’ can enter into a futures contract with another trader ‘Y’ on August 3, 2018, to buy 100 shares of Infosys Limited on October 3, 2018, at Rs.1,400 per share. The idea behind entering such an agreement is to reduce risks and book profits on changing markets. For instance, if the share price of Infosys Limited on October 3, 2018, is Rs.1,600, then trader ‘X’ stands to benefit as he gets to purchase the scrip at a lower price.
Another thing to consider here is that these futures contracts can be traded on the markets as well. This means that after entering into an agreement, investors can easily get out of it by transferring the agreement to someone else. In simpler terms, traders can trade their futures contract depending on their positions and preference.
In addition to trading futures contracts in commodities and securities, investors also have the option of trading futures contract designed on stock market indices. These are commonly known as index futures and as mentioned above, Nifty Futures are among the most popular index futures contract traded in the world. Needless to mention, Nifty Futures derives its value from the Nifty Index.
If you are looking to benefit from trading Nifty Futures contract, then you may want to consider the following tips & suggestions:
Understand the ins and outs of futures trading
As an investor who is looking to jump into the exciting world of futures trading, you should know that it is an entirely different ball game than trading in ‘regular’ stocks. You must familiarise yourself with all the aspects of futures trading before you get started.
This is because futures contracts have an expiration date unlike traditional stocks, which can be held forever. They will cease to exist at some point in time. Therefore, while trading in futures, it is important to time the market correctly and have a general sense of the market direction. You must also be careful while choosing the duration of your futures contract.
Keep in mind that in your journey, you will make mistakes and it is quite all right. Instead of trying to make amends, learn from those mistakes and let them guide you to make better decisions.
Have a directional perspective on the price of the underlying asset
In order to successfully benefit from futures trading, it is important to know and understand how the price is going to behave in the future. After all, you are essentially booking a position in the future and you need to have an idea of how things may pan out to be. While it is not possible to predict this with utmost certainty, you can most definitely counter your risks by carefully researching the underlying assets of your futures contract.
In the case of Nifty Futures, you can try to get a sense of how its value will move in the future by thoroughly studying up on the Nifty Index. If any of the major constituent companies are likely to perform well in the near future, then you can go bullish on the Nifty Futures contract.
Keep your emotions at bay
Futures trading requires a great deal of discipline, concentration, and patience. The decisions you make here need to be pragmatic and must follow market logic and sound reasoning, rather than emotions. If you incur a loss, don’t go chasing it blindly driven by a flurry of sentiments. You will only end up losing more. Keep your personal equations aside and enter the futures markets with a calm and composed mind.
Get in the habit of checking your calendar
Futures contracts have an expiration date – in India, the NSE Futures expire on the last Thursday of every month. Furthermore, investors in the country can buy their futures contracts for three trading cycles – near month (one), mid-month (two), and far month (three). Therefore, it is crucial to track the expiration dates of your contracts regularly and book your profits before they cease to exist.
Take advantage of technical charts and indicators
Understanding the intricacies of technical charts and market indicators may prove to be a difficult job for many, but it is well worth the effort. These indicators can be quite useful to make decisions, especially if you know what they mean. Some of the top indicators that every investor should know are Relative Strength Indicator (RSI), Average Directional Index (ADX), Bollinger Band, and moving averages. You can also look into candlestick charts and overlays to get a better sense of the movement of the markets.
Always buy a combination of futures contracts
Instead of opting for one futures contract, it is recommended to opt for two-three contracts in different sectors. In simpler terms, diversify your investments so that even if one contract fails to deliver good returns, you can bank on other contracts to perform well.
Stop-loss orders should comprise an important part of your futures trading strategies. These orders can be used to reduce your losses and also add an extra layer of discipline to your trading habits. At the same time, stop-loss orders can also be used to lock in profits. However, they may also lead to you missing out on potential opportunities to make an excellent profit.
Trading in Nifty Futures contracts is certainly an exciting prospect, although it requires a bit of skill, knowledge, and discipline. You should familiarize yourself with the concept of futures and must always ensure that you make your decisions based on market trends, analysis and indicators, rather than emotions and rumors. The individual investor can look to BankBazaar for more information on the same. Investing in stocks should be done keeping in mind personal financial commitments, risk appetites, and after extensive research.
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