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Important things to consider before trading In Nifty Futures

05 Jan 2023

Trading in derivative contracts like futures and options can be quite risky. However, they can also be very rewarding. This is precisely why derivative contracts are best suited for experienced traders. If you’ve been around the stock market block for quite some time now and you wish to get into derivative trading, then the Nifty 50 counter is a great place to start. 

Since Nifty is an index, the derivative contracts of the index are likely to be far more liquid compared to stocks. This makes entry and exit easy and hassle-free. However, before you get into Nifty futures trading, here are a few things that you should consider.  

1. Your positions are leveraged 

This is the first and foremost thing that you should always keep in mind when you’re into futures trading. Now, when you purchase a 1 lot of Nifty 50 futures, you don’t pay the entire cost upfront. Instead, you’re only asked to put up a margin of about 10% for normal trades and only about 5% for intraday (MIS) trades. 

Since you’re only paying a fraction of the cost upfront to purchase a contract, you may feel tempted to go overboard and purchase multiple lots. Doing so can amplify your profits significantly if the market were to react according to your expectations. However, it can also tremendously magnify your losses as well. So, this is something that you should always account for during Nifty futures trading.

2. Keep an eye out for open interest data 

Open interest is one of the most vital pieces of information that traders must absolutely keep an eye out for. Open interest can give you data on the number of futures contracts that Nifty 50 traders have bought and the number of contracts that they have sold. Reading into this data can give you a sense of where the market is headed in the near future. 

For instance, if the number of contracts sold is higher than the number of contracts bought, it may be indicative of the market turning bearish in the near future. And if the number of contracts bought is higher than the contracts sold, then the market may just turn bullish in the future. 

3. Ensure that the futures spread is marginal 

There is almost always a price difference between the spot price of Nifty 50 and the futures contract of Nifty. This difference is what is known as the futures spread. When trading in futures, you should be wary of the spread. For instance, if the futures spread is either steeply positive or steeply negative, it is a good idea to refrain from trading since they could mean that the futures contract is either overbought or oversold.  

4. Be wary of overnight risk 

Since Nifty 50 is an index, the overnight risk tends to be much higher than it is for stocks. Overnight risk is basically the risk of the market going against your expectations during the aftermarket hours. For instance, although Nifty may have closed a day on a high, it can still lead to a gap-down opening in the next trading session due to a variety of different factors. Overnight risk can even lead to severe losses as well. So, it is very important to properly account for it.  


Also, refrain from trading in Nifty 50 futures on the day of expiry. Volatility tends to be quite high due to contract rollovers and squaring off of positions. That’s not all. Liquidity can also drop significantly, leaving you stuck with open positions. 


Well, there you have it. These are a few of the most important points that you should always account for before you start Nifty futures trading.

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