Futures trading can seem complex and intimidating if you’re just getting started. This beginner’s guide aims to demystify the basics of futures and provide recommendations for futures trading demo account app that make getting started easier.
What are Futures?
Futures allow participants to take positions based on their view of which way the market may move. If an investor expects the price of an asset to rise, they can go long by buying a futures contract today locked in at the present price. Conversely, if they foresee a price fall, they can go short by selling futures contracts. This provides an opportunity to profit from accurate predictions without having to deliver or take delivery of the underlying asset.
Settling the difference between the agreed contract price and the price at expiration is cash settled on the exchange.In addition to speculation, futures are widely used by businesses, farmers, and commodity producers and consumers to mitigate the risk of adverse price changes for the goods they produce, transport, process or consume. This hedging mechanism protects their margins.
Margin Trading and Leverage
Unlike stock trading which requires paying the full price per share, futures trading uses a margin system. Investors only need to deposit a small percentage of the total contract value as an initial margin. This allows traders to control a larger position with less capital – providing leverage.
For example, an investor may need to deposit just 20% of the contract value as margin to control a futures contract worth ₹1 lakh. So the position size is 5 times the invested capital, providing 5x leverage. While leverage amplifies profits on winning trades, it also magnifies losses on losing trades. It’s crucial for beginners to use strict risk management and cut losses quickly to avoid being wiped out.
Delivery vs Cash Settlement
Futures contracts can be settled in two main ways – physical delivery or cash settlement. In physical delivery contracts, the buyer and seller agree to exchange the actual underlying asset at expiration as per the delivery terms specified in the contract. For example, in gold futures the long position holder may receive physical bars of gold from the short seller if held until maturity. However, taking or making physical delivery can be complex and involve additional costs.
Most futures exchanges have therefore adopted cash-settled contracts where no delivery occurs. Here, the position is simply closed out by calculating the difference between the agreed contract price and the settlement price on the last trading day. Profits and losses are paid in cash instead of delivering the asset. Cash settlement is simpler and more cost effective for participants. It avoids issues related to delivering, storing and insuring physical commodities. For this reason, cash-settled futures are preferred by most retail and institutional traders alike.
Choosing a Broker and Platform
Futures contracts in India are primarily traded through regulated commodity exchanges like the Multi Commodity Exchange of India (MCX) and National Commodity & Derivatives Exchange (NCDEX). These exchanges offer futures on various commodities as well as indices. In order to trade on these exchanges, investors must open an account with a brokerage firm. Brokerages act as an intermediary to place orders on the exchange on behalf of their clients. Some reputable full-service brokers provide online trading platforms to access the exchanges.
Trading platforms offer features like real-time market data and price quotes, charting and technical analysis tools, and order entry options. Advanced platforms also provide research reports, trading strategies and risk management capabilities. All of this enables traders to closely monitor markets and manage their positions efficiently. It is important to choose a broker registered with SEBI and the exchanges. The broker should have a proven track record of reliability and financial strength. Other factors to consider include upfront and ongoing charges, platform usability, and customer support quality. Reputable brokers ensure timely settlements, secure custody of funds and compliance with regulations.
Espresso – A Recommended Trading App
For beginners venturing into futures markets, using a dedicated trading app on mobile devices provides many advantages over desktop platforms. A recommended app is Espresso Trading, which offers a powerful yet intuitive mobile interface for managing futures and options portfolios on the go. Espresso features real-time streaming quotes and charts for over 150 instruments traded on Indian exchanges. Traders can practice with Espresso’s paper trading feature, which simulates live market conditions without financial risk.
The app’s margin calculator helps assess leverage levels for various contracts. Other useful tools include news and market commentary from expert traders. The app supports advanced order types like stop-loss and bracket orders for sophisticated risk management. Positions across exchanges can be monitored, with profit/loss tracked over time. Espresso prides itself on a simple onboarding process. Within minutes, users can set up a live trading account and start exploring markets. For beginners, this allows getting acclimatized to futures through paper trading before committing real capital.
Risk Management is Crucial
While futures trading provides a way to profit from price movements, it also exposes traders to significant risks due to inherent volatility and leverage. Therefore, managing risk prudently is vital for long term success in futures markets. Beginners should set strict risk limits, such as a maximum allowable loss per trade, to avoid outsized losses wiping out their capital. Stop-loss orders help exit positions automatically at pre-defined price levels to cut losses short.
Diversifying holdings across different futures contracts like gold, silver and crude oil helps reduce concentration risk. No single position should dominate the portfolio. Sufficient margin should also be maintained to withstand adverse price swings without breaching maintenance margins, which could trigger forced liquidation of positions at inopportune times. As leverage magnifies both profits and losses, new traders are advised to avoid using excessive position sizes beyond their risk tolerance. Over-trading should be avoided as well.
Futures may seem daunting but breaking them down into basic concepts makes them more approachable. With practice on a futures trading account app like Espresso and discipline around risk management, beginners can participate while minimizing potential pitfalls. Starting small and learning from experience is key to harnessing futures profitably.