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Future Perfect: Here are some useful tips for successfully trading futures

What are futures? Simply put, afutures contract allows an investor to speculate on the direction of a share, commodity, currency or any other financial security. Futuresare widely used by best online traders to benefit from the price movement of the underlying asset to help prevent losses from unfavorable price changes. Remember that when you buy shares, you can buy any number you please, even if it is just one share. In Futures, you buy a contract which will have a specific lot size depending on the share.For instance, right now if you want tobuy one contract of TCS futures, it will consist of 250 shares and if you want to purchase Tata Motors futures contract, it will comprise 1200shares. Remember that in futures, one always buys and sells in lots. Because it is effectively letting you take a much larger position that actual underlying stock value, you have to pay an amount known as margin in order to maintain such a position. Thus, when you buy a futures contract, you are not required to pay the entire value of the contract but just a small margin prescribed by the exchange. This higher leverage makes futures an exciting instrument with a high degree of potential if done in the correct manner.

So what are the tricks of the trade when it comes to successfully using stock futures to your advantage? Here are some useful guidelines.

Use leverage judiciously: Using the leverage offered by the futures in an efficient manner is extremely important in order to become a successful online trader. Remember that the margin is charged based on the total value of the contract. Given this, before taking any fresh position, try to assess the impact it will have on your entire trading capital and ensure that you do not overleverage.

Efficient use of capital: Futures can be a tricky financial instrument because if a trade goes wrong and is not cut in time, it can lead to heavy losses. This makes it essential that you only trade with funds they can afford to lose or trade only with your risk capital.

Have a proper plan ready for each trade: Like all other financial instrument, futures need a proper plan of action. While you will get a lot of stock market advice on the share prices, choosing the right futures contract in order to take advantage of the price swings needs to be done delicately.  You also need to know when to get in and when to get out of a trade. It is advisable to cut your position in a stock future when your target is achieved instead of stretching the position further even if the underlying stock values are witnessing further up move.

Use stop loss: This is probably the most important tool when it comes to successful stock futures trading. Smartly applied stop losses normally tend to separate a highly successful trader from an ordinary one. Before entering in a trade, always keep in mind a risk tolerance level i.e. a level till which you can incur losses from the position. Abide by it without fail.

Flow with the trend: Always ensure that you are flowing with the market trend in order to become a successful stock trader. This takes out the volatility component from your future trading and ensures that a high percentage trades end up on the winning side. In this regard, it makes sense to take share market tips only from authenticated sources and not to fall prey to general market chatter. 

Use short selling sensibly: Short selling is the act of selling shares without owning them. This basically means that you will sell futures contract of a share if you think that the price of the stock is going to fall form the present levels. Thus, you sell it at a higher rate right now and intend to buy it at a lower rate later. However, keep a time horizon in mind for such a trade and be careful while shorting a particular company’s share when the overall market is turning higher.

Conclusion: Please keep in mind that not even the highly successful traders are right 100% of the time and there would be some trades which are bound to go wrong. The key is to continue putting in more efforts in your analysis and sticking to the trading plan. Futures’ trading is a wonderful technique to accumulating wealth when done in the right manner and needs discipline, practice and judgment.

Blog by – Ashish Ajmera

Also read: How To Avoid Losing Money in Equities
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