Futures trading is a great tool to leverage bullish or bearish movements in the price of the underlying asset. However, the derivatives market can be a little unpredictable for beginners. Even if you know all the fundamentals, you might be unsure about how to start trading futures.
If you are just starting on your journey to trade futures, you are in the right place. Here are 5 things you need to know before trading futures.
5 Things to Know Before Trading Futures
Futures are derivatives that obligate the buyer and seller of the contract to execute it on a predetermined price and date. You can get into a futures contract by paying a ‘margin’ amount of the underlying asset to the seller.
Now that you know the basic concept, let us get into the specifics of 5 things to know before trading futures.
- Open Demat and Trading Account
The first step of trading futures is to open online demat account with your broker. A well-known futures trading platform like Dhan offers a simple process of opening an account. You will need a working email id, phone number, photo, signature, identification, and bank account documents to create and verify a trading account.
- Make Your Trading Plan
Once you have a trading account up and running, the next thing to know is your trading plan. Decide if you want to day trade or spread trade before putting your foot entirely into futures. If you are just beginning, you can keep it simple by buying one contract and selling another. Thus, know your risk appetite and goals to make a trading plan that suits you.
- Use Trading Demos
Before getting headfirst into futures trading, you must know your game. If only there was a simulation you could try before trading in the real world! The good news is, most online brokers offer a demo atmosphere based on real-time market data. They can be a great tool for understanding the practical implementation of margin and leverage concepts.
- Utilize Charts and Features
For making potentially profitable trades, you need to be picky while choosing your futures contract. Use specialized charts, view positions, and analyze depth, profit and loss to decide which ones are worth the shot.
Many broking platforms offer features such as a margin and leverage calculator, real-time trades, and instant pledge/unpledge benefits. Explore these features and understand how to use them before trading futures.
- Try ‘Stop-Loss’
Ended up making a bad futures trade? Don’t worry. Reputed futures trading platforms offer the option of a ‘stop-loss’ order for futures, which can help you get out of unfavorable trading positions. You can set a trigger for a predetermined price, which will be automatically executed as soon as your trade meets that criteria.
Conclusion
Futures trading is a great investment tool to profit from changes in the price of the underlying asset. However, the trade must be based on a logical plan unique to the trader. Once you open a trading account, you can start trading futures. But before you do that, remember to understand its nuances and keep learning.
