Common Futures Trading Mistakes

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Common Futures Trading Mistakes

Futures and futures derivatives market contracts offer traders a way to lock in the price of an underlying asset or commodity. Expiration dates and prices are known in advance for these contracts. The expiration month is the date on which the futures are identified. For instance, the December gold futures contract expires in December.

Many futures traders begin to make some decent profits, then suddenly, they discover endless losses. These losses eat away at their trading capital as they try to figure out what they’re doing wrong. You must understand the common mistakes to succeed in trading on a futures market. This article will inform you about common future trading mistakes to avoid losses.

Mistakes To Avoid Future Trading

Learning about common future trading mistakes is also very important as we learn some tips and tricks when we open a free demat account. The major mistakes to avoid in the futures derivatives market are explained below;

Futures and Options Trading Requires Stop Losses Just Like the Cash Market DOES;

Futures trading is leveraged, so you must maintain precise stop losses and profit targets. The requirement to stop losses and achieve profitability targets is, in fact, far more intense for futures than for cash due to the leverage of these assets. Always use a risk-return trade-off while trading futures and options! If a stop loss is activated or the profit objective is surpassed, you should immediately close off your future position.

When options are involved, don’t forget the importance of stopping losses. It’s also important to keep a stop loss, not just if you sell options but even if you buy options, to minimise your losses.

Not All Futures Sellers Are Against The Stock;

Do not start selling futures because you notice a buildup of short sides. The other institution could set up arbitrage positions depending on where they purchase and sell on the spot and in futures markets. This non-directional method is unaffected by changes in the market. Do not mistake this for a recommendation to short or sell futures. Avoid interpreting short collection as selling in futures and attempting to go short on the stock. Since these are non-directional trade tactics, you will probably come out on the losing side. Alternatively, it might only involve balance changes.

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Futures are Hedges;

Do not use them as a stand-in for trading. Leveraging your position is one thing; believing that your margin is equivalent to your capital is another. When trading futures, your gains can increase exponentially, but your losses can also increase exponentially due to the effect of your leverage! Leveraging your position in the futures market can excite you since it will increase your profits if the transaction is successful. The problem is that the opposite is true regarding the future. When asked to add MTM margins, that’s the real problem.

Investors Frequently Think That Since Futures Holders Do Not Receive Dividends, They Need Not Be Concerned About the Influence of Dividends on Futures Prices.

However, dividends impact future prices, which is not a discount. Dividends indeed affect futures. The amount of the yearly dividend must decrease the monthly contract price. For example, if the firm is quoted in the cash market for Rs. 700 and will pay an annual dividend of Rs. 24. This does not mean that the futures are cheap or have been underpriced because of a discount. Parity will be restored when the ex-dividend date is over. The lesson is that you shouldn’t jump into buying a futures contract when trading at a discount to the spot price.

Don’t Buy and Sell Options Without Considering Liquidity; Have You Seen Some Option Strikes And a Lack of Liquidity in Futures?

Large stocks are not affected, but many mid-cap equities, particularly closely held small caps, are affected by diminishing liquidity. In volatile market conditions, the trend is more obvious when futures contracts can be traded with wide tick spreads. You have an immense spread of risk due to disappearing volumes. Several traders are frequently detained in this place.

Not to be Open to New Ideas;

Markets change from time to time. There’s always a new idea that can help you improve your results, no matter how good you think you are as a trader. Traders tend to get trapped in the false assumption that they know everything and don’t want to learn anything new. Such a trader leaves nothing but losses when market conditions change.

Conclusion

To be a good futures trader, you must stay informed, stick to your system, develop your skills, and learn from mistakes made by yourself and others. By following these simple principles, you will be more likely to achieve a greater profit and less loss in the challenging yet rewarding future markets. Suppose you are willing to keep a step in the future and option trading. In that case, the best trading app in India is the Kotak Securities app for safe and secure trading for beginners and experienced traders with multiple trading tools.