Wednesday, 13 January 2016

Pros and Cons of Futures Trading



Advantages and Disadvantages of Futures Trading

 Futures trading is amongst today's most highly leveraged, potentially profitable financial pursuits. It allows traders to build up their trading accounts fast with only a small amount of capital at their disposal. However, if you take futures trading lightly, you could also wipe out your trading account in a matter of days. Therefore, it's crucial to your trading success that you diligently educate yourself in futures trading, and trade only with a proven and solid trading strategy.
If you're new to futures trading, it can be especially difficult to decide WHICH contracts to actually trade. There are a lot of options! The best approach would probably be to start with the more popular commodities, until you have a better idea of which contracts most fit you and your trading.
The more you know about the basics of futures contracts and commodities like this, the better your chances of trading success. With any type of online trading, there are a number of factors that you should take into account. Here are four of those factors, along with an assessment of how futures trading measures up:

1.) The Capital Requirements
In order to trade a futures contract, you need to deposit an initial investment into your futures trading account. Currently, brokers require a minimum of Rs 50000 to trade in NIFTY Futures.

2.) The Leverage
The leverage depends on the futures contract you're trading and the contract value. Each contract requires an initial margin. Here are some examples for the most popular contracts (as of January 2016)
On an average indian brokers allow intraday limit of 5 times so if you have an deposit of Rs 50000/- as collateral then you may trade 5 lots of Nifty
Leverage plays an important part in speculation

3.) Liquidity
Again, the liquidity depends on the futures contract you are trading. Here are some numbers:
NIFTY : around 300,000 contracts/day
RELIANCE : around 37,000 contracts/day
USDINR : around 1160000 contract/ day
As you can see, the liquidity varies, and therefore you MUST check the volume of the futures market you are planning to trade.

4.) Volatility
You will find decent volatility in the futures markets. The high leverage will allow you to make decent profits, even if the markets move just a few points. Here are some average daily moves:
NIFTY : around 17% Annual Volatility
RELIANCE : between 30% and 33% annualized volatility
Keep in mind that these moves represent approximately 50-100 points per day for each contract traded.

Conclusion:
Futures markets can be very liquid, and the capital requirements are as low as Rs 50000. The leverage is at least 1:5 and some brokers provide leverage of 1:10, and there's decent volatility.
Futures markets are regulated and the spread is typically 1 tick (minimum movement of the contract). Commissions are usually below .02% and now a days there are Discount brokers who allow you to trade Rs 15 per trade. It's no surprise that many day traders choose the futures market for their trading endeavours.