Introduction to Futures trading career :
Futures trading career is not for everyone. It is available on different kinds of assets- stocks, indices, currency pairs, commodities and so on. But trading futures contracts is not every body’s forte.
Does your future as an investor or trader in these markets hold a bright promise? Only if you are clear about the pitfalls and the hurdles before taking the leap. So, let us learn about the basics and what you must know before stepping into the world of futures trading career.
How to Futures Trading in Everyone
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Futures Contract: Dealing in Shares or Index for Fixed Time in the Future
Futures trading career contract is when there is an agreement between a buyer and seller to transact a fixed number of shares or index at a certain time in the future for a price which is predetermined.
Futures trading career contracts can be freely traded on exchanges as they are standardized in terms of contract size and expiration date. The two most commonly traded futures contracts are stock futures and index futures.
Stock futures: Derivative contracts that authorize purchase or sale of stocks at a fixed price by a specific date.
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The lot or Contract Size: Trading Beyond Single Shares
Within the derivatives markets, contracts cannot be traded for a single share. Every stock futures trading career contract comprises a fixed lot of underlying share. Size of the lot is based on the exchange on which trading is carried out and differs from stock to stock.
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Duration of Futures Trading Career Contracts: As Easy as 1-2-3
The contract is an agreement for transacting in the future. Futures trading career contracts are available for durations of 1,2 and 3 months known as the near, middle and far month.
Once the contracts expire, a fresh contract is introduced for the 3 durations. Month in which contract expires is referred to as contract month.
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Index Futures: Measuring Changes over Time
The stock index is used for measuring changes in prices of stocks over a period of time. Stocks of similar future trading companies are selected in terms of industry or size.
There are many popular indices such as CNX Nifty 50, S&P500 and many more These show price movements on different exchanges or segments. Futures trading career contracts are available on these indices as well.
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Futures Trading Career Contracts: Equal Measures of Risks and Rewards
Here are some of the benefits of trading in futures trading career contracts:
- Hedgers can shift risk to speculators
- Traders get an idea of what the futures trading prices of stock or value of an index has the potential to be
- Current future price determines future demand and supply of shares
- Margin trading allows small speculators to take big chances in the futures trading techniques market
But with the rewards come the associated risks too which are as follows:
- Excessive speculation due to high leverage could lead to mammoth losses
- Derivative products in futures trading techniques are more complicated than stocks or trading an index
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The Pricing Model: Cost of carrying Versus Expectancy
Futures refer to derivative products whose value is based on the price of the underlying asset, but this pricing is not direct. 2 models are most commonly used for pricing of futures trading career contracts:
Cost of carrying Model: This model holds that markets are perfectly efficient therefore there are no differences in cash and futures trading prices.
This model does not allow for arbitrage or when traders benefit from price differences in two/more markets.
Therefore, the price of a Futures trading career contract is equivalent to Spot Price minus Net Costs in carrying asset till maturity date.
Futures Price= Spot Price + (Carry Cost- Carry Return)
Carry cost is the cost of holding the asset till futures trading career contract matures. Carry return is the income derived from the asset while holding it like dividends, bonus etc.
Carry Cost- Carry Return= Net Cost of Carry
Keeping a position open in the cash market can mean losses or gains and price of futures trading career contract forms the basis of these.
Expectancy Model: This states that future price of an asset is the spot price expected in the future. So market sentiment is the key to pricing of futures trading career contract according to this model.
This model holds that there is no link between the present spot price of asset and its futures trading prices. Trends mean everything in this model, where future prices are used to anticipate price fluctuation in the cash segment.
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Basis: Difference between Spot Price and Futures Price
Different between the futures trading prices and its spot price is the basis. The basis is negative if futures trading prices of the asset is trading higher than spot price and positive if the opposite is true.
- The basis of asset is negative: Bull market
- The basis of the asset is positive: Bear market
Sale and purchase if futures trading career contract is the same as transacting units of stock from the cash market. The only difference is the delivery is not immediate. As far as index futures trading techniques is concerned, you can trade in the same way as you would in shares.
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Buying a Futures Contract: Steps to take in the Present
A prerequisite of stock market trading, whether in the derivative segment is the future trading account. Apart from this, you also have to pay the entire value of shares purchased if the transaction is in the cash segment.
Upfront payment is referred to as margin money. This reduces the risk an exchange undertakes and helps in maintenance of the integrity of a market. Once a futures trading career contract is purchased, the margin money is handed over.
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Settling of Contract- Going Beyond Immediate Delivery
While trading in future contracts, transactions do not involve the immediate delivery of assets. Settling of contract happens only on the date that it expires. Traders can also settle before the contract’s expiry if they choose to do so.
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Buying a Futures Contract: Steps to take in the Present
A futures market requires individual investors to engage in 4 different kinds of margins without which buying or selling is not possible.
- Initial margin- This is the percentage of the total value of the contract which has to be paid upfront
- Exposure margin- Set by the exchange for controlling market volatility and too much speculation
- Premium Margin- paid to contract sellers/writers
- Mark to Market Margin- Covers difference between contract cost and closing cost
Initial margin is the percentage of the open position and is set for different positions by clearing or exchange house. Factors influencing the amount of initial margin are volatility of stock and interest cost.
Exposure margin is set by exchanges for controlling volatility and excessive speculation and is levied on the value of the contract that has to be brought or sold.
Mark to Market Margin- This is the difference between the contract’s cost and its closing price on the day of the purchase of the contract. Following this, the margin covers daily differences in closing prices.
Premium Margin- This is the amount provided to the seller for composing contracts. Mentioned on per share basis usually, this enables the buyer to pay the margin when one receives the same as a seller.
Margin payments enable traders to encash on opportunities in the market by paying a small sum of cash instead of the complete value of the contracts.
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Don’t Buck the Trend, Follow It
The hardest advice for a trader is to follow the trends. Traders are independent-minded individualists who are not one of the crowd or part of the herd. Bucking the trend will not work, following it will.
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Follow a System, Don’t Descend into Chaos
Be very clear about your reasons for stepping into futures trading techniques, if you want to reach the milestones for success. Successful futures trading techniques is all about being crystal clear about possible market fluctuations in the coming time. If you lack clarity, don’t expect to get very far in the markets.
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Over-trading will Cause Under performance
Performance is everything when it comes to futures trading techniques. So, you must avoid over-trading and apply money management techniques for trading.
Acquire a position only when the profit goal is known and you are aware of how to move out if things get tough. Trade with trends rather than against them and don’t trade multiple markets with little capital.
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Volatility Can be Explosive
Trading volatile contracts is a double-edged sword. You can’t have it easy if you opt for the hard choices a volatile market forces you to make. Remember to compute the risk/reward ratio before opting for a trade and guard against the risk of holding on to it for too long.
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There is No Place for Emotions in Futures Trading Career
One important point is that you need to establish trading plans prior to the opening of the market for eliminating any emotional loss of objectivity.
Be clear about entry and exit points as well as objectives. Act, don’t react if you want to make profits. Opt for a sessions change only when you have a good enough reason to do so.
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Follow a Plan, Think Ahead
Once a position has been set and stops are selected, don’t opt out till the stop is reached or the fundamental reason for taking a position changes. Use technical analysis to maintain discipline and don’t compromise on emotional objectivity.
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Discipline is Essential
Have a detailed plan for each trade which will not change unless hard data supports it. Disciplined money management involves intelligent trading allocation as well as risk management and when you make a successful trade, don’t be carried away by the success of the winning move.
Remember that futures trading career is like a game of chess..you can only survive if your next move is good enough.
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Impulse Trading is Out
A disciplined trade selection system is essential. Being impulsive rather than objective can cost you more than a single trade. Trade with a plan rather than basing it on emotions. Plan how to take out profits, decide margin risk on trade and where to get out in the market.
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Cut down on Your Losses
An important point to remember is that cutting your losses short will pave the way for letting your profits run. It’s not easy to admit a mistake, but the sooner you do, the less it will cost you in futures trading career.
If a position keeps going against you, it’s time to get out fast. Use stop loss or you will lose out on your gains.
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Have a Sound Trading Plan
This involves clear understanding of entry and exit points, price objectives, risk-reward ratios, stops, data about historical price levels, seasonal influences, chart analysis, prices of related markets and government reports. If you leave out the fine print. don’t expect to make profits.
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Don’t Overstay a Bull Market
If you stay long enough, bull markets can turn bearish quite fast. If you overstay a good market, you are bound to overstay a bad one too. Have the ability to cut down on losing positions quickly. Futures trading career that gives profits is all about knowing when to pull in the kite and when to let it fly.
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Accept Losses, Adjust to Gains
Another important point is that you need to accept your losses and adjust to the profits. Learn to trade from the short side and watch for divergences in associated markets. Standing aside is as important as stepping in. In the markets, patience is a virtue.
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Don’t Add to a Losing Position
If you think that balancing out losses by investing more is the way to go, there is only one direction in which you will move downwards! So, watch out for this and make sure you don’t pick the losing side because that is how futures trading career can have very bad repercussions with the passage of time.
Conclusion
Adding to profits, cutting down on losses, staying rational, not losing emotional balance…these are all essential elements of successful futures trading techniques.
To be an excellent in futures trading career you have to grow the capacity for forward thinking and perceiving market fluctuations before they rise. Staying ahead in the game is all about anticipating the next move.
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