Derivatives Market: Futures Trading Techniques – Axis Direct
May 02, 2018 | Source: www.advisorkhoj.com
Derivatives: Futures Trading Techniques
Let us start with some basic trading techniques in futures because futures behave just like stocks and therefore are easier to understand.
Futures Trading Technique
If you think that the stock or index (e.g. Nifty) price will rise before the expiry of the futures contract, you may sell the futures of the stock or index (e.g. Nifty). This is also known as taking a short position. This is a major difference between Futures & Options market and the spot (or cash market) in our country. In Indian stock market, you cannot sell shares unless you own the shares. However, you can sell futures, even if you do not own the shares. If the stock / future price falls, you will make a profit and if it rises, you will make a loss. Traders have made a lot of money by taking short positions, especially in bear markets, but traders should always be careful, because in a market there are both buyers and sellers, and the balance of power keeps shifting between the two groups of players.
I would like to think of the market as a soccer (football) game played between the bulls and the bears. Both teams want to score a goal and not concede one. Accordingly both teams attack and defend. When one team goes on the offensive and builds pressure, the other team goes on the back foot. The offensive team seeing the other team going defensive gets emboldened and commits more players upfront, so that they can score goals and finish the game. Committing more players upfront leaves the defence weak; this leaves the offensive team vulnerable to a devastating counter-attack from the defending team, and then the offensive team finds themselves down by a goal instead of leading by three.