9 Hidden Things To Know About Futures Trading

What is Futures Trading?

Futures trading is trading at a pre-decided price to be carried out after a specific period of time, in the future, between a buyer and seller. For more details refer to our “ Fundamentals of Futures Trading” topic.

9 Hidden Things to Know About Futures Trading:

1. Intelligent Use of Span Margin and Exposure Margin:

Futures Trading has the feature of being allowed to enter a trade with only a portion of the total trade value actually invested. When you are considering a particular futures trade, analyze and understand the minimum amount of money you have to put down. Many times, you may need to invest only around 10% of the total futures contract value upfront.

But let it not be a wild guess or a 10% thumb rule to follow. Using trend analysis, find out if the asset price is expected to increase or decrease in the future. If a price increase is on the cards, you can decrease the amount of money you have to invest upfront and maximize your profit.

2. Using Stop Order as Part of Futures Trading Strategy:

Be clear about when to get out of a trade, how much you are willing to lose, and when you would like to lock in your profit. The Stop Order which is an order to buy or sell at a specific price is used to limit the losses or ensure your profit is secured. For this, the stop order should be well below the profit target, with a basic goal of allowing your trade to make more money than you can lose. Discuss with your broker your risk appetite and the money you have to invest beforehand and then set up the Stop Order.

3. Know when to Roll a Position:

Closing a futures trade at the stipulated time is the norm, but if you want to stay in the trade, you should decide carefully when you want to extend the position to another expiration date. This extension to another date in the future is called “Rolling a Position”. Basically, you close your position, while simultaneously opening a new position in a contract with a longer date in the future. Use this strategy if you want to give your trade more time to deliver the expected profit. Never wait till the last day of the contract. Start analyzing 2 weeks before if you need to roll a position based on market analysis.

4. Trend Analysis and When to Get In:

Always understand the market trend and look to get in at key entry points and go along with the trend. This is true, especially for futures and options trading. Trend Analysis of the asset price will help you understand whether the price is gradually going to go down or up. It is never a case of straight-up always or downward spiral of the price to the end – Try to enter a trade based on whether the trend is upwards or downwards, not on the actual price difference between yesterday and today.

5. Accept the Risky Nature of Futures Trading:

Know that you can make a lot more money than expected in Futures trading but, you may also lose more money than what you invested initially. The actual outcome may be somewhere in between the two extremes, but you have to be clear about the risk involved and the amount of money you are planning to invest. This money should not come out of fixed assets or money set aside for essential expenses. The risk involved should be clearly understood before you start investing. This will give you the right frame of mind to make clear decisions and maximize your profit or minimize your loss.

6. Narrowing Down Versus Diversification:

It is always better to have less diversification and not trade in many markets at the same time in futures and options trading. This is because, the amount of time and energy needed to invest in a particular market and ensure you make a tidy profit is a lot, and you should not strain yourself trying to trade in too many markets and staying on top of the news in each industry.

Know when to use Diversification also, as in, investing in 2-3 markets so that even if you make a loss in one, you can compensate for it by profiting in the other.

7. Avoid the Beginners Mistake of Investing All You Have:

If you are just starting trading, never make the mistake of putting all your available money into futures trading. Be cautious and only invest a portion of it and test the waters. You must have a trading strategy or discuss with your broker the strategy you can adopt in the current market scenario.

8. Know When to Quit:

Just like it is important to know when to enter the market based on market trends, it is equally important to know when to get out of a trade. Realize when you have stayed on too long with a loss-making trade and take action. You can make up for the money already lost by possibly gaining in a different industry.

9. Use of Automated Trading Software in Market and Trend analysis:

In order to aid with Trend Analysis and deciding your market strategy, robust automated trading software tools are available. Find out if you can invest in them, or better yet, find out if your broker has Trend Analysis software that can help you with clear charts, graphs, and projections into the future. Everything cannot be done by yourself, especially in risky futures trading, it is always advisable to take the help of software and professional brokers who can help you grow your money in a safe and monitored environment.