Nifty represents both the market and the economy in general. This makes trading Nifty futures a common substitute for trading the market as a whole. You can rely on the Nifty technical chart for short-term trading signals. For example, the Bank Nifty chart provides investors with a benchmark that captures the capital market performance of Indian bank stocks.
Let us go over some key points you can check on the Nifty technical chart when trading Nifty trend futures intraday and in the long run.
Check the futures spread over the spot price
Futures contracts typically trade with a spread over the spot price. The current cost of funds usually determines the monthly spread over the spot price. It is also known as the cost of carry, and futures are typically quoted at a premium.
There are two things to keep an eye out for here:
- Don’t buy Nifty futures when trading at a significant premium to the spot index, as this could indicate overpricing and excessive optimism.
- Don’t rush to buy when the Nifty futures are trading at a discount, as this could mean aggressive futures selling. Before trading Nifty futures, you should understand the spread’s logic.
Treat it as a leveraged position
Nifty futures, like all futures positions, are leveraged. If you buy one lot of Nifty in the next month, your margin for normal trades will be roughly 10% and 5% for MIS (intraday) trades. That means a normal trade is ten times leveraged, and intraday trades are twenty times leveraged.
It works in both directions. Profits can be multiplied by leverage, but so can losses. As a result, any Nifty futures trading must be done with strict stop losses and profit targets.
Check the data on open interest
Before entering into a Nifty futures position, it is always good to conduct scientific data analysis. A quick look at the Nifty futures open interest and accumulation trends will tell you if the open interest accumulates on the long or short side. It will allow you to form a more informed opinion about Nifty’s direction.
Avoid liquidity traps
There are times when the Nifty futures can put you into a liquidity trap. For starters, once the rollovers are substantially completed on the expiry day, the volumes on the Nifty futures typically vanish. Furthermore, when the market falls sharply, spreads can widen significantly, increasing your risk of trading Nifty futures.
Whether you buy or sell Nifty futures, it is a linear position that can result in unlimited profits and losses on both sides. While stop losses are essential when trading the Nifty, it is also necessary to understand the margins.
- You must pay an initial margin when you open the position, including the VAR and ELM margins. Brokers must now collect both of these margins, and ELM is no longer optional.
- You must pay MTM (mark to market) margins based on daily price movements. These have implications for your capital allocation.
Be cautious of the overnight risk in Nifty futures
Even if you place stop-loss orders during the day, they will not cover your overnight risk. For example, what can you do if you are long on the Nifty Futures and the Dow crashes by 200 points on opening? Stop losses are ineffective, and you are exposed to overnight risk in Nifty futures.
Use the counterparty perspective
It is an intriguing aspect of trading Nifty futures. When you buy Nifty futures, another party sells them, and the same logic applies when you sell them. Whether the other party is a trader or a hedger, open interest data will provide you with the necessary information. While your view of the Nifty normally drives you, it is always beneficial to understand the opposing view to get greater clarity.
Keep track of dividends, transaction costs, and tax
When trading Nifty futures, keep in mind that you are committing real money, so three factors are critical.
- Futures do not pay dividends, so dividends cause futures to trade at a discount. Consider this when making a decision.
- There are brokerage and statutory costs to consider when trading Nifty prediction. These impact your breakeven point.
- Nifty futures are treated as securities for tax purposes. Hence, any profit or loss will be treated as a capital gain or loss, with the corresponding tax implications.