Several investors have stepped into the stock market due to the higher capital gains that it offers in comparison to other investment options. When it comes to futures trading, it is important to have a strategy in place so that you can maximise your profits. In this article, we will dig deep into futures trading.
What are Futures?
A futures contract is a derivative financial contract that draws its value from the performance on another property or security. With futures, the parties are obligated to transact a particular asset at a price and date that are predetermined. The seller should sell the underlying asset whereas a buyer must purchase an underlying asset at a particular set price irrespective of the current market price on the expiration date. These underlying assets mainly include physical commodities along with other financial instruments.
Futures have different elements involved such as the symbol, instrument type, and the expiry date. The symbol usually refers to the name of the company whereas the instrument type represents the underlying asset of a particular stock of a company. As you would be trading in futures, the instrument type is ‘stock futures’. Finally, each of these futures stocks have an expiration date by which the contract ceases to exist.
The futures market uses high leverage. This means that, as a trader, you would not have to invest 100% of the value of the contract to enter a futures trade. Instead, you only have to invest a marginal amount that consists of a fraction of the total value of the contract.
What are Options?
With an options contract, you have the right but not the obligation to buy or sell shares at any specific price. This holds good as long as the contract is in effect. Options are mainly based on the value of an underlying security of any particular stock. You will have to pay a premium amount for options contracts. These premiums represent the strike price of the asset.
5 Steps to Master Futures Trading
If you are planning to get into the habit of futures and options trading daily, it can be helpful to strategise in advance and formulate a trading plan. This can help you reap greater benefits and mitigate losses.
- Set a Risk Level
While trading futures can be exciting, it is important to not get carried away. Ensure to set risk levels, preferably ranging between 1% and 5% so that you can make profits while also mitigating losses.
- Research the Stock
Before you trade futures, interpret the chart and understand the trends behind it. It can help to identify your stop loss and other parameters while you trade.
- Set Entry Rules
Make sure that you have a set of entry rules that you follow. Your strategy should be effective yet simple so that you can follow the same easily.
- Set Exit Rules
Exit rules are as important as entry rules. When you get signals that a particular trade is not following your strategy, it is best to exit the trade. This can help you avoid losses.
- Analyse Your Performance
After you complete your trade, maintain a habit to journal your trade. Note down your entry point, exit points, losses, and profits. After writing them down, analyse your performance so that you can improve your strategy in the next trade.
All About The Futures Trade
The process of buying a futures contract can be confusing to many. While buying a futures contract, a few things begin to happen in the background. Let us have a look at them.
1. Margin Validation
When you enter into a futures agreement, you will be asked to deposit a certain amount of money. This amount of advance is a percentage of the contract value. If the margin provided is insufficient, you would not be able to buy a futures contract.
2. Counterparty Search
Once the margins are validated, if you plan to buy a futures contract, an appropriate seller would be looked up.
Both you and the seller will digitally sign the futures agreement in a symbolic way.
4. Margin Block
Once the signoff is completed, the margin that is required will be blocked in both the accounts of the seller and the buyer.
Where Can I Trade Futures?
There have been plenty of brokerages coming up in recent times. You can trade futures on any of these platforms offered by brokers. You can start your journey on Dhanush by Ashika Group. This application provides a platform that is easy to use. Before beginning to trade in futures, it is best to familiarise yourself with the entire trading mechanism. It can also be beneficial to test out trading strategies so that you can maximise your profits.
Final Thoughts Trading futures can be lucrative. Successful trading practices can help you maximise your profits while making sure that you don’t lose plenty of capital in the process. It is also important to understand the futures trading process before starting your journey as it can help you trade in a much more efficient manner. If you plan to follow futures and options trading daily, make sure that you maintain proper records of your progress so that you can analyse your performance and improve over time