Stock Market Learning Index
Complete guide to master stock market trading
Foundation Concepts
Stock Market Basics
What is stock market and how it works?
Market Terms
All important market terminology
Trade Types
Different types of trades
Trading Styles
Various approaches to trading
Candlestick Patterns
Bullish, Bearish & Continuation patterns
Chart Patterns
Technical chart analysis
Support & Resistance
Key price levels identification
Market Analysis
Technical, Fundamental & Price Action
Advanced Trading
⇜Futures Trading⇝
Let's dive into learning futures trading in a very detailed and easy-to-understand way. Here you will know all the concepts step by step, from the basics to most advanced strategies out there and you need, with simple examples. So lets start→
What is Futures Trading?
A futures contract is an agreement between two parties to buy or sell an asset (like stocks, commodities, or currencies) at a predetermined price on a specific date in the future. These contracts are legally binding, and both parties are obligated to fulfill them.
What is Futures Contract?
An agreement between two parties to buy or sell an asset at a predetermined price on a specific date in the future. These contracts are legally binding.
Buyer's Role
Agrees to buy the asset in the future at the contracted price, regardless of market conditions.
Seller's Role
Agrees to sell the asset in the future at the contracted price, obligated to fulfill the agreement.
No Ownership Now
Unlike stocks, you don't own the asset now—you're trading an agreement for future transaction.
Example:
Imagine you believe the price of gold (currently ₹80k for 10 gm) will increase in the future. You enter into a futures contract to buy gold at ₹90k for 10 gm in 3 months.
- If gold's price rises to ₹95k, you profit because you're buying it at ₹90k while the market price is ₹95k.
- If gold's price falls to ₹75k, you lose because you're still obligated to pay ₹90k.
Why Trade Futures?
Futures trading has two main purposes:
Hedging
To protect against price fluctuations (e.g., farmers lock in crop prices to avoid losses if prices drop).
Speculation
To profit from price movements without owning the actual asset.
Key Terminologies in Futures Trading
1.Contract Size
The quantity of the underlying asset in the futures contract.
Example: 1 gold futures contract = 10 gm of gold
2.Margin
The amount you need to deposit to trade futures. It's a small percentage of the total contract value.
Example: If a gold futures contract is worth ₹200,000 and the margin is 5%, you only need ₹10,000 to trade
3.Mark-to-Market
Your account is adjusted daily based on the profit or loss from the markets daily price movements.
Example: If gold rises by ₹200, your account is credited with the profit for the day
4.Expiration Date
The date when the futures contract must be settled.
5.Leverage
Futures trading allows you to control a large position with a small amount of money (margin). While this amplifies profits, it also increases risks.
How to Pick Stocks for Futures Trading
To trade futures effectively, choosing the right stocks is crucial. Here's how:
Look for Liquidity
- Liquidity means there are lots of buyers and sellers for the stock
- High liquidity ensures easy entry and exit
- Lower transaction costs
- No slippage (price difference between expected and actual execution price)
Example: Stocks like Apple, Tesla, or indices like the S&P 500 have high liquidity
Check Volatility
- Volatility measures how much a stock's price fluctuates
- High volatility: Big profit potential but higher risk
- Low volatility: Safer but limited profit
- Moderate volatility is best for futures trading
Example: A stock that moves $10 daily is more volatile than one that moves $1
Analyze Trends
- Uptrend: The stock's price is rising consistently
- Downtrend: The stock's price is falling consistently
- Range-bound: The stock's price is moving sideways within a range
- Use Support Resistance, Moving Averages, Trendlines, Candlestick Patterns, Chart Patterns, Price Action etc to identify trends
Sector Performance
- Choose stocks in sectors with strong growth or momentum
Example: If technology stocks are performing well, look for futures contracts in that sector
Fundamental Analysis
- Evaluate the company's financials, including:
- Revenue growth
- Profit margins
- Debt levels
- Competitive position in the market
Example: A fundamentally strong company like Hdfc, Reliance etc is less risky for futures trading
Tools for Analyzing Stocks for Futures
Technical Analysis Tools
1. Support and Resistance
Support: A price level where the stock tends to stop falling. Resistance: A price level where the stock tends to stop rising.
Example: If a stock's support is $50 and resistance is $60, it will likely trade within this range
2. Moving Averages
Helps identify trends.
Example: If a 50-day moving average crosses above a 200-day moving average, it's a bullish signal
3. Indicators
Relative Strength Index (RSI): Measures if a stock is overbought or oversold. MACD: Identifies trend reversals. Bollinger Bands: Measures volatility.
4. Candlestick Patterns
5. Chart Pattern
6. Price Action
And Do Fundamental Analysis Of Stock Also
Risk Management in Futures Trading
Position Sizing
Only risk 2-3% of your total capital per trade.
Example: If you have ₹10000, don't risk more than ₹200-300 loss on a single trade
Stop-Loss Orders
Automatically exit the trade if the price moves against you.
Example: If you buy a futures contract at ₹100, set a stop-loss at ₹95 to limit your loss
Hedging
Use options or other futures contracts to reduce risk.
Example: If you hold a bullish position, you can buy a put option as insurance
Avoid Overleveraging
While leverage can amplify profits, it can also magnify losses. Trade within your financial limits.
Common Futures Trading Strategies
Trend Following
Trade in the direction of the overall trend. Tools: Use moving averages or MACD to identify trends.
Breakout Trading
Buy when the price breaks above resistance or sell when it breaks below support. Confirm breakouts with high trading volume.
Range Trading
Buy near support and sell near resistance in a range-bound market.
Calendar Spread
Involves buying and selling futures contracts with different expiration dates.
Example: Buy a near-term contract and sell a longer-term contract to profit from price differences
Step-by-Step Futures Trading Process
Set Up Your Trading Account: Open a futures trading account with a broker. Ensure you understand the margin requirements.
Select the Asset: Choose a stock, index, or commodity with high liquidity and good trading opportunities.
Analyze the Market: Use technical and fundamental analysis to predict price movements.
Enter the Trade: Decide your position - Buy (long): If you expect the price to rise. Sell (short): If you expect the price to fall.
Monitor the Position: Track daily price movements and adjust stop-loss levels if necessary.
Exit the Trade: Close the position before expiration or let it settle if it's in your favor.
Conclusion
Futures trading can be profitable but requires knowledge, discipline, and risk management. To trade effectively:
- Focus on liquid and moderately volatile assets
- Use both technical and fundamental analysis
- Implement strict risk management strategies
- Continuously learn and improve your strategies
By following these steps, you will build a strong foundation for success in futures trading.
Remember, futures trading involves significant risk. Always educate yourself, practice with small amounts, and never invest more than you can afford to lose.