Trading in Nifty Futures
Recent developments in the financial and technological landscapes have made trading in futures and options (F&O) more streamlined and easier. Futures are derivative contracts that are helpful in various scenarios and have also proven to be a viable instrument through which traders can earn money. In this blog, we will explore how to trade Nifty Futures and other key points about futures.
What are Nifty Futures?
Knowing Nifty and futures is vital for learning how to trade these instruments.
A future is a financial contract that allows the holder to buy or sell the underlying security at a given price at a predetermined date. A future is a derivative contract that has no intrinsic value of its own and expires on a specific date. It derives its value from the underlying asset, such as stocks, indices, or commodities. A change in the price of the underlying asset will result in a change in the value of the futures contract.
The Nifty 50 is one of India’s benchmark indices. The index tracks the top 50 companies in the Indian stock market. For someone who wants to trade the entire market or index, purchasing or selling individual stocks is a complicated and time-consuming process. Here’s where traders can make use of derivative contracts like Nifty futures and options (F&O).
Nifty futures are future contracts that derive their value from the Nifty 50 index. If the Nifty 50 rises, the value of the futures contract will increase too. Similarly, a fall in the Nifty 50, will result in a decline in the future contract’s value.
Companies | Type | Bidding Dates | |
| SME | Closes Today | ||
| SME | Closes 22 Jan | ||
| Regular | Closes 24 Jan | ||
| SME | Closes 24 Jan | ||
| SME | Opens 23 Jan |
How to Trade Nifty Futures?
Now that we have understood what the Nifty 50 is and what future contracts are, let’s look at how to trade Nifty futures. In order to trade derivative contracts, it is necessary for you to open a demat account and a trading account. Compare the facilities and costs of different brokers before selecting one. Follow the account opening process and submit the required documents, such as your PAN card, Aadhar card, and income statement. Once the account has been created successfully, you can begin trading derivative contracts. Before you begin Nifty future trading, here are some key things you must know:
Expiry Date
The Nifty futures expire on a given date. There are typically three expiry dates for Nifty futures – usually the current month, mid-month, and far month. Before entering a trade, it is important to select the appropriate expiry date.
Lot Size
A futures contract has a lot size of a specific number of shares. A trader can multiply the lot size with the value of the futures contract to derive the contract value.
For example, the Nifty 50 futures are trading at 23,000 and have a lot size of 75.
Contract Value = 23,000 x 75 = Rs 17,25,000.
Margin Requirements
In order to take a position in Nifty futures, you need to know the required margin. You can use an online margin calculator to calculate the required margin for a particular instrument.
Trading Nifty Futures
Step 1: Search for Nifty futures on your trading platform.
Step 2: Select the appropriate expiry date
Step 3: Before taking a position, it is important to study the spot price of Nifty. The value of the futures contract moves in accordance with the spot price of Nifty.
Step 4: You can take a long position if you are bullish on the Nifty (or the market) or go short if you are bearish on the Nifty (or the market).
Step 5: Enter the number of lots you want to buy or sell and place a market order. In the case of a limit order, enter the desired price at which you want to enter the trade before placing an order.
Step 6: Once the order is placed, monitor your trade and enter your stop-loss or take-profit orders to exit the trade systematically.
Things to Keep in Mind While Trading Nifty Futures
Trading Nifty futures can be an attractive way to generate returns. However, there are certain things that one should keep in mind while trading in Nifty futures.
Leveraged Positions
Futures contracts are leveraged positions. You need to put up a margin, which is a fraction of the contract value, which allows you to take a large position with lower capital outlay. The leveraged nature of these contracts may result in significantly higher profits but at the same time, the losses can be substantial as well. As a result, you need to manage the risk and position size accordingly.
Open Interest
While trading Nifty futures, keep an eye on the open interest (OI) for the contract. One can gauge the market sentiment and the strength of the underlying trend based on the open interest build-up.
Nifty Future Trading Strategies
Traders can make use of several tools and technical indicators to develop Nifty future trading strategies. Indicators such as the relative strength indicator (RSI) and moving averages can be used in combination with candlestick patterns. Traders can use Nifty futures for scalping, swing trading, and hedging their positions. Some prominent futures trading strategies include breakout trading, calendar spreads, and pullback trading.
Overnight Risks
Many traders hold futures contracts overnight. Although swing or positional Nifty future trading strategies can deliver returns, it is important to weigh the overnight risks. Any global events or external factors that take place after market hours can significantly impact the value of the Nifty 50 and its derivative contracts.
Pricing Differences
A key point to keep in mind while trading Nifty futures is that the future contracts usually trade at a premium to the spot price. Traders should avoid purchasing futures when they are trading at a higher premium than the spot price. Similarly, traders should refrain from going long when the futures are trading at a steep discount as it may indicate weakness in the underlying.
Conclusion
With the help of futures contracts, traders can capture upmoves or downmoves in the Nifty quickly and easily. Traders can generate substantial returns by trading Nifty futures. However, it is important to know the risk that derivate contracts carry. Placing stop-loss orders, managing the position size, and following proper risk management can make your trading journey more fruitful.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.