8 Golden Rules for NIFTY Futures Trading

Investors try futures for hedging, attractive returns, price speculation, and other reasons. Equity and index futures are popular among both retail and institutional investors. You can find many futures contracts based on different NIFTY indices. However, trading NIFTY-based futures is not an easy task. You must be familiar with NIFTY futures trading tips to make the right decisions.

Topics Covered:

• Understanding the NIFTY Futures Market
• Eight Golden Rules for Successful NIFTY Futures Trading
• What are the Basics and Benefits of NIFTY Future Trading?
• Conclusion

Understanding the NIFTY Futures Market

The NIFTY futures market consists of contracts based on NIFTY indices. You might know that NIFTY is a series of market indices operated and updated by the National Stock Exchange (NSE) in India. Futures contracts based on NIFTY indices derive their value from the performance of a group of companies.

You can find futures contracts based on NIFTY 50, NIFTY 500, NIFTY AUTO, NIFTY IT, and other major indices. A futures contract can be based on the value of the particular index, which is also the underlying asset. Let us delve deeper and discuss some NIFTY future tips.

Eight Golden Rules for Successful NIFTY Futures Trading

Here are some NIFTY futures trading tips to earn higher returns and minimise losses:

1. Determine the Difference Between Spot Price and Futures Cost

   One must examine the difference between the spot price (current market price of the asset) and the futures price. Let us say the NIFTY 50 spot price is 22,000, and futures are trading at 22,100. Now, you come across another futures contract based on NIFTY 50 trading at 22,600. You can quickly know that the difference between the spot price and the trading price is more than expected. You can analyse the fair value for futures by knowing the spread beforehand.

2. Consider NIFTY Futures as a Leveraged Position

   Investors must approach NIFTY futures as leveraged positions in the market. Investors pay only the premium while purchasing a futures contract. While futures can open doors to attractive returns, they can expose the portfolio to losses. You might know the exact cash settlement amount only on the expiration date of the contract. For the same rationale, investors must use stop-loss orders, spreads, and other techniques to prevent losses on leveraged positions.

3. Consider the Liquidity Issues

   NIFTY futures are popular in Indian markets. One can easily find these on the NSE. You can easily buy and sell futures based on popular indices like NIFTY 500, NIFTY 50, etc. However, the liquidity for some NFITY indices might not be high. You might face challenges in buying or selling those futures. Investors must check the trading volume and liquidity associated with the futures before making a decision.

4. Consider the Open Interest Factor

   Investors must make a habit of analysing the open interest data before trading NIFTY futures. Open interest refers to the total number of outstanding or active contracts at the end of the trading day. The open interest date can help understand the investors’ sentiment regarding a particular futures contract. Also, one can know whether short or long positions are trending for a particular futures contract. You can collect the open interest data for a specific period (say six months or a year) to understand the trending positions.

5. Don’t Forget to Address Margin Requirements

   Many investors rely on margin from stockbrokers to take positions in the NIFTY futures. In this context, margin refers to the additional amount you need to keep in the trading account. This amount is reserved to cover potential losses while taking market positions. You must have a certain upfront amount in your trading account, known as the initial margin. Investors might have to maintain the ELM (Extreme Loss Margin) in some situations. Traders must also keep an eye on the MTM (Mark-to-Market) margins, evaluated based on daily price changes.

6. Consider the Brokerage

   Investors must consider the transaction charges before investing in NIFTY futures. Brokerage or transaction charges are applied by the respective stockbroker. You cannot implement NIFTY futures trading strategies effectively and make good profits when brokerage is high. It is essential to choose a stockbroker with minimal transaction charges on futures trades. Also, investors must include the brokerage when calculating the breakeven point.

7. Understand the Tax Implications

   NIFTY futures are treated as financial securities in India. Capital gains and losses will be subjected to taxes. Investors must be familiar with tax regulations in their respective jurisdictions for NIFTY futures gains and losses.

8. No Dividends

   Futures are financial contracts, which aren’t similar to stocks. However, a futures contract can be based on a particular stock. Since futures aren’t equity instruments, you will not receive dividends. You will make a profit or experience a loss on the expiration date of the contract. Also, you will pay a premium to purchase a futures contract in the market. Similarly, you will receive a premium upon writing off a futures contract.

What are the Basics and Benefits of NIFTY Future Trading?

Now that you know NIFTY futures trading tips, here are some basics and benefits:

• These contracts are agreements based on the market indices provided by the NSE. For instance, the NIFTY 50 futures contract will allow the investor to buy/sell the index at a predetermined price on a future date.
• Since NIFTY 50 is an index, you cannot actually purchase it. For the same rationale, NIFTY futures are settled in cash. The difference between the strike price (contractual price) and the current NIFTY price on the expiration date is used to settle the contract.
• One must know that these futures have a maximum trading cycle of three months in India.
• NIFTY futures can be used for price speculation and hedging by investors. Also, they are readily accessible to retail investors.

Conclusion

You can trade futures contracts based on NIFTY indices. It will allow you to benefit from price fluctuations in the NIFTY index. You can open a trading-cum-Demat account in India to start NIFTY futures trading. Also, new investors must be familiar with NIFTY futures trading tips to minimise potential losses.

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