Friday, January 21, 2011

Futures Trading In Indian Stock Market - Part II

Question:  Are there any risks involved in the Futures Market Trading ?

Answer:  The risks of Futures trading are that losses will also get multiplied in the same manner as profits do. For example, if the same stock “A” drops from Rs 280 to Rs 260 in that period of time, you would make a loss of Rs 20 per share which amounts to Rs. 10,000. The Rs. 20 per share loss would translate to an 11% loss in the cash market with total money buying and a whopping 35% loss in the Futures market.

Question:  How can one be able to reduce such huge losses implied in Futures Trading?

Answer:  To effectively reduce/minimize such losses you have to be vigilant about the market. Suppose, you are bullish and you hence buy Stock “A” futures. But Stock “A” futures start moving down after you have bought. You can square up your stock futures position at any point of time thereafter. You can buy at 10:30 in the morning and sell off at 11:00 on the same day. There is no restriction at all.

Concept of STOP LOSS. One of the great feature in Futures trading is Stop Loss. This is a feature where you can place a STOP LOSS order in the stock exchange system which will limit your losses if the trade goes against you after execution. In this example of ours where you have bought the Futures of Stock “A” at Rs. 280 per share expecting it to go to Rs. 330 and at the same time you know that you can only afford a maximum loss of Rs. 10 per share i.e. Rs. 5000 on a single lot of 500 shares if the trade goes against you. So what you will have to do is that you will place a Stop Loss order of Rs. 270 so that if unfortunately the price of the stock goes down the system will automatically square off your position and get you out of the trade restricting any further losses.

Question:  What is the limitation of Futures Market in comparison to Cash Market ?

Answer:   There is a limitation of Futures market when compared to Cash Market and that is in the form that Futures expire on the last Thursday of every month In cash market there is not expiry date and you can keep the shares as long as you please and also there is no minimum number of shares which have to be bought in the cash market as has to be done in futures market in the form of FIXED LOT of shares of a particular Stock as decided by exchange. Expiry of Futures contract means that January Futures will expire on 27th January (if 27th is the last Thursday). At the same time Stock Exchanges also provide a better opportunity by running more than single month Futures. Like for example a person can buy the Futures Contract of March month in January itself and this March Contract will expire on the last Thursday of March.

Read Part I

Read Part III

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Required US Government Disclaimer & CTFC Rule 4.41

Futures trading contains substantial risk and is not suitable for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only consider risk capital that should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. CTFC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS SUCH AS LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. All trades, patterns, charts, systems, etc., discussed in this website or advertisement are for illustrative purposes only and not construed as specific advisory recommendations. All ideas and materials presented herein are for information and educational purposes only. No system or trading methodology has ever been developed that can guarantee profits or prevent losses. The testimonials and examples used herein are exceptional results which do not apply to average people and are not intended to represent or guarantee that anyone will achieve the same or similar results. Trades placed on the reliance of Trend Methods systems are taken at your own risk for your own account. This is not an offer to buy or sell futures interests.