How to trade futures? A step by step guide

In many ways, Futures and Options (F&O) have revolutionised trading all over the world. Futures were introduced in Indian markets nearly 20 years ago. Indian traders have embraced the derivatives market to such an extent that in 2020, NSE became the largest derivatives exchange by volume in the world. 

What are the advantages of futures trading?

Traders have a sole objective and that is to make profits. Futures trading allows them two distinct advantages as compared to cash market trading: 

1. It gives them exceptional leverage
2. It allows traders to short the market, which is nearly impossible to do in Indian cash markets

Futures are instruments that derive their value from an underlying asset. Futures have a fixed quantity and a fixed expiry date, and the Securities and Exchange Board of India (SEBI) regulates futures trading in India. Hence, futures trading is pretty secured. Also, futures contracts are very liquid, and therefore traders find it easy to square-off positions.

What you must know about futures trading

Futures trading in Indian stock markets can be done for various assets, but stock futures and index futures are the most popular. In India, all the futures contracts have three contracts running simultaneously with near month expiry, mid-month expiry, and far month expiry. In India, monthly contracts typically expire on the last Thursday of the month and in the event of that being a holiday, it happens on the preceding working day.

Why are traders fascinated by futures trading?

A primary reason due to which traders are attracted to futures is the leverage accorded by the instrument. Ideally, the margin required to trade stock futures is between 20%-60% of the total contract value, and in the case of index futures, it is only 10%-12%. The low margin requirement allows the trader to take up more positions with limited capital. The margin required has two components – exposure margin and SPAN margin. 

SPAN Margin is the requisite minimum margin mandated by the exchange, whereas exposure margin is required over and above SPAN to cover Mark to Market (MTM) losses.

Another very enticing aspect of futures trading is that one can enter or exit a position at any given point in time. Some scalpers exit positions within minutes, while some traders do it intraday or within days or weeks.

How is futures trading done?

Suppose you are still wondering how to trade futures in India, let’s understand it in simple terms.

1) The first step is to activate your trading account and enable it to allow for trades in F&O. 

2) Then, load the margin amount in your account and start researching the right strategy to enter and exit trades. 

3) You can either use your broker’s platform to place an order or ask your broker to place the orders for you.

Summing up

If you are new to F&O trading, it would be best to obtain an expert’s help before taking the final investment call. Futures trading is exciting and comes with a lot of growth potential but research well about the risks associated with every trade you take.