Demystifying Derivative Trading - FAQ
What are derivatives?
Derivatives, such as futures or options, are financial contracts which derive their value from a spot price, which is called the "underlying". For example, the term "contracts" is often applied to denote the specific traded instrument, whether it is a derivative contract in nifty index, equity shares, commodities like gold/silver or currency pairs like USD-INR. Derivatives are a key part of the financial system.
How are equity, currency and commodity futures different from one another?
They are all similar in that they are all futures contracts with different underlying as spot. The margins, expiry, lot size, tick size are all varying and they should be properly understood by reading up the specification sheets of these contracts from the exchange website.
I have traded in the past and have made huge losses and therefore I am now afraid to trade the futures. So what should I do?
It is most important when you trade such instruments is to manage your position sizing and risk management so that you never end up losing more than you can afford to. So, you have to define that amount at the beginning of getting into such any trade based on any strategy and accordingly take a position in that trade.
Since Trading in F&O is very risky, so how to protect the downside and preserve my capital in such trades?
The answer is same as the earlier question. It is most important to define your position sizing rule and risk in each trade, so that you only incur possible downside in the loss making trades to the maximum extent already defined by you.
How can I learn more about how to analyse and trade live market?
Obviously the best way is to learn from someone who is qualified and has done it in the past and therefore you must attend the live workshops listed here. This enables you to build the right foundation and get the right approach in the subject matter, which is utmost critical for being a successful trader/investor. Post workshops, you will be in right frame to further absorb more knowledge in the right way from books prescribed, to continually build onto the foundation created and then you could choose to be part of our live forum where lots of analysis is done in live market.
I am a long term buy and hold investor ? How does derivatives trading make sense to me?
Trading capital in such case should be limited to 5-10% of your total investment capital and should be seen like a diversification among your various investments. Obviously the risk and rewards are much higher compared to others. So, you should be basically interested or attracted by Trading to make it worthwhile your time and energy. Apart from that, Options are worthwhile instruments to be used for hedging or earning an income on investments held by you. Also, derivative trading can be used to take advantage of all kinds of market situations - bullish or bearish whereas investing only works out in bullish situation or over long term.
How does using TradersCockpit helps in derivative Trading?
Today, using software to analyze is the way to go in modern Trading and TradersCockpit is passionate about making accessible modern day tools for individual traders so that you can analyze live market data quickly without spending hours in gathering, sorting and analyzing data. Click here to see how TradersCockpit helps you to analyze better while trading/investing.
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