How to Make Money Trading Futures?

You might point out that the bigger question is, “Why to trade futures?”!

Yes, you are right.

Why to trade futures?

In fact, there is one reason why you should not; the risk associated with futures trading.

Apart from that, there are several good reasons why you should go ahead and trade futures.

Here’re a few compelling reasons for trading futures and how to make money:

Sell and Make Money

  • You read it right. You can sell and make a lot of money. You might want to argue that if I don’t have the stock, how can I sell it? If you have it and if sell it, you will not be able to make a lot of money. You will only get the difference between the buy price and sell price.
  • On the other hand, you can sell in Futures even if you don’t have it in your portfolio. Great, isn’t it? All you need to do is find out a stock or index in a downtrend and sell it. If it moves in your direction, you can make insane amount of money!
  • Let’s say it goes against you. Then you have a smart thing called “stop-loss”. You take a minor loss and get out and try again. So you lose some money when you are wrong. But imagine the kind of money you can make when you are right!
  • Selling is unique for the reason that it takes time for the markets to go up but it can fall pretty quickly. All it needs is a good trigger. You see a lot of red on your screen every day, don’t you? That’s because something or the other is in downtrend.
  • You need to spot it and sell it. Easy as you like. If you get it right a few occasions even, it will make you huge amounts of money.
  • Markets will give you this opportunity time and again because markets are cyclical; they keep going up and down. Nifty goes to 11000 and comes back to 9900 and goes back and come back so on and so forth…The same is true about stocks.
  • Stocks like SBI and Tata Steel have been in an infinite trading range. Short it when it goes in a downtrend. There would be plenty of opportunities all the time.

Buy it and Make Money

  • Conversely, you can buy a lot of Nifty Futures and make money if it is in an uptrend. If Reliance Industries, Infosys or TCS is in a secular uptrend, go ahead and buy a lot of their futures and sit back and watch while it goes up and up.
  • The reason why traders love futures is because you can trade Futures with limited capital and it makes money many times more than the cash market.
  • Think of buying 1000 shares Reliance Industries in cash. It will take you 12 lakh rupees to purchase it. On the other hand, you can buy it in Futures with a small sum of 1.5 lakh. It gives you 10 times more power to purchase. At the same time, it gives you the same returns if it moves in your direction.
  • Therefore, you can buy it at a minimum capital and make a lot of money. Let’s say you have 12 lakh rupees in your account. If you buy in cash, you can buy 1000 but if you buy in futures, you can buy 10 times more! Imagine the returns when it moves in your direction!
  • When you see tangible and sound reasons why a scrip or index is going to move up, you can capitalize on this instrument of futures. So when Reliance was trading around 900 or 1000, if you buy one lot of Reliance, and then it goes to 1200, imagine the kind of wealth it can create for you!

Use it as a hedge and make money

  • Let’s say you have around 15 lakh rupees and you buy 1000 shares of Reliance Industries in cash market. It will cost you around 12 lakh rupees. Now what if it goes down? What’s your hedge? How can you protect that kind of trade?
  • This is where futures can help you. You can buy one lot of Reliance in Futures and just become worry-free. If it goes up, you have nothing to lose. You have it in cash so the loss in futures is not going to matter.
  • If it goes down by chance, you have loss in cash but you gain in futures. It offsets the loss in cash. You keep selling it each month till you don’t see a reversal of trend on the charts. When it comes to your level again, you would have made a lot of money!
  • You can continue to make money in spite of the fact that market has primarily gone against you. This is the kind of advantage that futures provide!

Pair Trading

  • If you don’t have the stomach for trading futures on their own, you can get into pair trading. You can buy Nifty futures and sell Bank Nifty Futures. This is pair trading.
  • If Nifty goes up but Bank Nifty does not go up as much, you get to make money. If Nifty goes down, Bank Nifty will provide sufficient support. So you will not lose money.
  • If Nifty stays there and Bank Nifty declines, you still make money. There are various scenarios in which you will be able to make money.
  • You can do the same kind of pair trading in stocks as well. Buy and sell the futures lot of HDFC and HDFC Bank, if you like. Or ICICI and Axis or BPCL and HPCL. There are endless possibilities in pair trading.
  • You can find some of the other opportunity in pair trading that will make some money for you. But it works out for you because you can trade futures. If you had to do it in cash, you would not be in a position do in cash because it will require huge capital for one trade.

What you need before trading futures:

Before you trade futures, you need to be clear about the following:

  • Futures is a risky proposition because each lot is of many hundred shares. You should trade it only when you are sufficiently confident about your assessment of the markets.
  • To be sufficiently confident of the markets and its trend, you need to have some base for your assessment. It could be anything. It could be fundamental analysis of a stock. It could be sound knowledge of technical analysis. You need to be thorough in your analysis- fundamental or technical – to give you that kind of clarity and confidence to arrive at the trading decision.
  • You should exercise the discipline and make sure that you get out when you are wrong. Don’t allow your trades to linger for too long. It can quickly turn into large losses.
  • If you are not confident, you should hedge your futures trade with options. For instance, you should buy a call or put option against your buy or sell of futures. So if you buy one lot of Reliance, you should one put to hedge and support your futures trade. It gives you some cushion if it goes against you.
  • Stay with your winners. In the long term, only those who stay with their winners make money in the markets. In other words, when the markets go in your favor, stay with your winning trades for as long as you can. Until and unless you see a change in the trend, you should not get out of that trade. Your winning traders are the trades which will support you against a series of losing trades.
  • Don’t trade futures if you don’t have additional cash that you can put into your account as margin. When the trade goes against you, you will need more money in your account. It is possible only if you have sufficient free cash that you don’t need on a daily basis.

As you can see, Futures is an exciting way of trading and making money from the markets. Wealth creation that everyone craves for will not happen based on 10 or 20 Reliance that you purchase in cash. Futures is the only surest and quickest way to create wealth in very little time. There are risks associated with it but if you can manage the risks and minimize your losses, you can incredible amount of money trading futures!

Wish you happy trading futures!

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