This article on How to Trade Nifty Futures is in continuation to What is Nifty 50 Index (Nifty) & How to Trade Nifty? which guide the beginners to understand all about Nifty Index, its constituents and how to trade or invest in Nifty?
The article will be more or less similar to the one we have written on How to Trade Bank Nifty Futures? but still we are getting a lot of requests from our readers to write one specifically on Nifty Future Trading. For those who have already gone through How to Trade BankNifty Futures might find this very similar but still can take some time to read and know about Nifty trading.
So, for those interested in trading nifty futures should learn & understand more about what is Nifty and its future contract requirements & features.
What is Nifty 50 Index?
Nifty 50 Index or more preferably known as Nifty is India`s most followed economic indicator. It is the weighted avergae of most liquid and top capitalized 50 (now 51) stocks listed on the National Stock Exchange (NSE) that covers 23 sectors of the Indian Economy. Nifty 50 represents about 65% of the free float market capitalization of the stocks listed on NSE as on March 31, 2016 and is an ideal financial instrument for futures traders in India.
The Nifty50 composition do not remains same always as the stocks which do not perform and in-turn leads to a fall in their market capitalization are replaced by other companies which performs and have their market cap more than the underperformers. Refer the table below for the changes that happened in Nifty 50 Index in 2016.
|Index Name||Event Date||Script Name||Description|
|Nifty 50||01/04/2016||Cairn India Ltd.||Exclusion from Nifty Index|
|Nifty 50||01/04/2016||Punjab National Bank||Exclusion from Nifty Index|
|Nifty 50||01/04/2016||Vedanta Ltd.||Exclusion from Nifty Index|
|Nifty 50||01/04/2016||Aurobindo Pharma Ltd.||Inclusion from Nifty Index|
|Nifty 50||01/04/2016||Bharti Infratel Ltd.||Inclusion from Nifty Index|
|Nifty 50||01/04/2016||Eicher Motors Ltd.||Inclusion from Nifty Index|
|Nifty 50||01/04/2016||Tata Motors Ltd DVR||Inclusion from Nifty Index|
To get a further deep understanding of the Nifty Index, please visit What is Nifty 50 Index (Nifty) & How to Trade Nifty?
What is Nifty Future?
Nifty Future is a derivative contract traded on National Stock Exchange of India (NSE) whose underlying is Nifty 50 Index. This means that Nifty futures will derive its value from the Nifty index which in turn is dependent upon the movement of top stocks in the index as per below:-
# Infosys 8.42%
# HDFC Bank 7.79%
# ITC 6.38%
# HDFC 6%
# Reliance 5.67%
#ICICI Bank 4.81%
# TCS 4.71%
# L&T 3.59%
# Sun Pharma 3.07%
# Tata Motors 2.76%
These Top 10 stocks in Nifty has a weight-age of more than 53% of Nifty Index.
Nifty Future is the most trade-able and liquid equity index future with traded contracts of approx 160 crores and turnover of Rs. 45,748,616 Crores ($ 6,896.82 Billion) in 2015-16.
Future contract on Nifty Index was launched on June 2000.
|Trading Volume in F&O Segment of NSE (2014-15)|
|Products||Underlying||No. of Contracts||Turnover|
|(Rs. Crores)||US $ bn|
Contract Specifications of Nifty Futures
|Lot Size||75 Units|
|Contract Value||Rs. 5,92,500 (7900 x 75) (Index Price X Lot Size)|
|Total Margin||Rs. 47,000 (Approx. as on April 18, 2016)|
|Tick Size||.05 (Rs. 3.75 per Tick Size)|
|Price Fluctuation||1 index point = Rs. 75|
|Trading Hours||Monday – Friday : 9:15AM – 3:30PM|
|Expiry Date||Last Thursday of the contract month|
|Trading Cycle||3-month trading cycle – the near month, the next month and the far month.|
|Daily Settlement Price||Last half hour’s weighted average price|
|Final Settlement Price||Final settlement price for a Nifty futures contract shall be the closing price of the underlying index (CNX Nifty Index) in the Capital Market segment of NSE on the last Thursday of the contract month.|
|Final Settlement Procedure||Final settlement will be Cash settled in INR based on final settlement price.|
|Settlement||All the Future Contracts are Cash settled in INR.|
To understand in detail all the key terms or terminologies used and how a futures trade work in the real market, Read Article: Part VI – Getting Started With Trading : How to trade Futures Market?
How to Trade Nifty Futures?
Trading Plan for Nifty Futures
Planning is crucial for the success of any business. So to get started with trading you need a proper plan, a plan to design a road map to follow to achieve you trading goals. Every trader should frame up mechanical ways to trade the markets to overcome taking trading decisions on the inherent human habits and that can be achieved only by developing and framing “A Right Trading Plan”.
Framing your trading plan and developing a habit of following your plan strictly go hand in hand. So, the traders task is to work on pre-defining the trading plan defining the system of entering the trade, price & time of your entry, reasons to enter a trade, stop losses, systme of exiting a trade, etc
Capital Required to Trade Nifty Futures
Nifty futures has a lot size of 75 units per contract for which an initial margin of Rs. 47000 is required which is approximately 7.9% of the total contract value of Rs. 5,92,500 (30 x 16,200) on April 30th, 2016 i.e. we have to deposit an initial margin of approx Rs. 47,000 to initiate a long or short position in Nifty future and carry it till the expiry of the Contract i.e. May 26th, 2016 (provided we have a ledger balance to take care of any daily mark to market losses (M-M Losses)), if any.
There are two options available for future traders to meet out the margin requirement for the contract obligation.
- Cash Margin – Nifty traders are required to deposit approx Rs.47,000 for initial margin to their broker. By cash margin, we mean a clear credit balance in the Ledger of the trading account.
- Stocks as Collateral – To meet out the initial margins of the future contract, stocks can be used as a collateral with the broker to take the day position or even for the positional. If you are holding stocks in your DP account, then same can be utilized as the security margin, provided such stocks are under approved list and the total value of the stocks (after haircut) is enough to meet out the margin requirement of Rs. 47,000. If you are holding A-category stock (Eg – Dr. Reddy) in your DP then 80-90% of the value of the stock can be used as a security margin. So, there is no need to deposit the cash margin or a clear ledger balance.
For traders, who don’t have any holding in their DP, and are maintaining a clear ledger balance in their trading account can buy Liquid Bees of the same value of Rs. 47,000 (i.e. 47 units) which can be used as a collateral for the margin money and same can fetch you approx 5-6% return in a year.
In year 2014-15, Liquid Bees has generated a dividend return of 5.712%. For more. visit Dividend Calculator of LiquidBees.
So, traders who are planning to use the DP Stock or Liquid Bees as a collateral for the margin security are required to take care of any mark to market losses, if any.
So if you have a loss in your first trading loss of say Rs. 2000, then you have to pay your broker Rs. 2000 or sell stock or liquid of the same value. But on the other side, if you have your first trading profit of say Rs. 3000, then this amount will be credited to your ledger and now you have a clear balance of Rs. 3000 to take care of any mark to market losses if any in the future. Such a strategy is best suited for day traders as they need not to maintain extra margin for trading.
Suppose, we have deposited a total capital of Rs. 50,000 for trading purposes then Rs. 47,000 will be debited in the ledger by the broker if we will carry the position overnight.
Day Traders can trade Nifty futures by getting intraday exposure provided by brokers by having only 1/3 to 1/2 margins of the actual required i.e. Rs. 15,600 – 23,500 in their ledger thus over-leveraging the leveraged vehicle but no position can be carried overnight or against the stocks holding in their DP as discussed above. (Not advisable for Beginners)
Number of Contracts to Trade?
Beginners should only start trading with one lot size (i.e.75 units) to first understand the mechanism of the market and know how well their trading strategies performs and once they start to make consistent profits from the market and their capital starts to grow then only they should increase the lot size to trade.
It should be kept in your mind that trading is a long term learning process which requires a lot of efforts on the part of the trader that can help them create and acquire long term valuable assets – Knowledge, Skills, Positive Belief, Experience and Psychological Control. These valuable assets will not only help you make money from the market but also help you learn the skills to keep them forever.
So, if you are able to double your capital and had a margin requirement fulfilled for another lot from your profits rather than adding up a fresh capital, then add with one more lot size and start trading with 150 units (i.e. 2 lots). This basically proves the fact that you are learning the trading business and now you are ready to take more responsibility for trading bigger contract size than before.
Capital protection should be the utmost priority for any trader especially when you are trading a futures market. So, every trader should develop a risk management mechanism which can help to save their seed capital and protect the profits too. Always protect your trade by using stop losses whenever you buy or sell short Nifty Futures. Traders should not ever risk more than 5% of their capital to any single trade i.e. a maximum stop loss of Rs. 2350 (47000 x 5%) or 31 points. Stop loss could also be set fixed according to risk profile of the trader.
We usually take smaller risk of 10-20 points (i.e. Rs. 750-1500) on any single trade be it day trade or positional by entering on smaller charts to take low risk trades. Then market will have to prove us wrong atleast 31 times to knock us out of his capital of Rs. 47000.
So, do not enter the trade if you cannot decide where to place your stop losses. Stop losses are your protective tool and will always keep you alive. Stop-losses works as a much better mechanism to exit the market whenever market proves your trading decision to be wrong. They serve as the best tool for any trader to remove any room for decisions based on emotional element. So, whenever a trade goes against you, you will be automatically out from the market with a predefined limited loss. Every professional trader aims to take close stop losses to better manage their capital. This require a trader to refine their trading entry plan that can help them trade and enter the market with very close stop losses.
This will generally help you to achieve a higher end of Risk : Reward ratio by taking more points when you are right and giving our small whenever you are wrong. Even a accuracy of 50% will ensure that you are profitable at the end of the year or month.
Read Article: How to use stop losses to reduce your risk? Coming Soon.
Read the article 12 Step-wise Trading Rules for New Traders to be Safe in the Market to frame-up and understand the most important rules and aspects of trading for the survival and growth of a trader:-
#1. Never being too Anxious to Start Big Early
#2. Knowing Who You Are – A Trader or An Investor or An InvesTrader?
#3. How to Choose & Know Your Market to Trade?
#4. Reasons & Facts to Trade
#5. How Not to Screw With the Market – How to Follow the Trend of the Market?
#6. Know Where to Place Stop losses to Protect Your Capital & Profits?
#7. Evaluating Risk to Reward of Each Trade
#8. Never Changing Your Stop Losses with Good Reasons
#9. How to Trail Stop losses to Protect Capital & Profits?
#10. Knowing the Reasons to Exit a Trade
#11. Never OverTrading
#12. How not to have too many Open Positions at any time?
What Returns to Expect from Nifty Trading?
It depends on the expectation of the traders. But the easiest way is to target it according to your stop loss i.e. by calculating return: risk. Beginners should focus and target on achieving 2:1 trades and as soon as your experience and market knowledge improves you can target the higher side of the Return: Risk scheme to 3:1 then 4:1 etc. This means that for every day trade, if you are taking a stop loss of 20 point, then target your profits of atleast 40 points.
But as your trading experience and knowledge starts to grow, you can strive to achieve a differnet trading style to take big trades of 100-150 points on Nifty futures with small risks of 20-30 points.
As we are trading a 10:1 leverage product, so any 1% move in BankNifty will be a 10% return on your capital.
The idea here is to strive and achieve the higher end of the Risk : Reward with more trading experience and knowledge of the market so that we can make our trading on some fronts were we have the ability to make big profits from a single trade with less managed or even no risk at all.
Read Article: Where and how to protect and book your profits? Coming Soon…
Time Frame to Trade (Whether Day Trade or Positional Trade)?
Its actually both. Try to know a market very well that it starts to talk about it by itself what it us going to do in the coming hour, or day or week or the whole month or year.
So always start with big charts because small moves are the part of the big moves. As big players prepare and trade for big moves, they undergo preparation for the few days to weeks or months as someone who is managing some $50 billion will not be entering and exiting the market very soon. It takes time for them to accumulate and distribute that is why when a trend starts it stays for long – For Days to Weeks to Months or Even Years.
It s always important to follow the big players. They are the one who knows more than us or are an expert in their business, or we should say Market Knows More Than Us. So, Always Follow The Market. When market is showing weakness – Go With It. Don’t start feeling bullish till it shows you signs of buying or bullishness.
Always start with analyzing and finding trades on the big time frames (Daily or Weekly Chart) then get into the intraday charts (continuous) 5 min, 15 min or 30 min and keep a close tab on the market movement to get a closer entry and with small risk. Then as soon as you enter the market and you have placed in your stop loss, then again go back to the bigger time frame and see how well the market is performing according to your expectations.
My style is to watch EOD, Weekly and Intra-day charts all together. Our Minute and EOD charts are always in-sync with each other. By minute chart we don’t mean we are just watching the chart for a day, rather minute chart for the whole month or two or more. As EOD don’t tells us what the market has done within, so to get a feel of it, we try to get in. So any setup on EOD charts or big 15min charts led us to enter the market on small charts and whenever we are not able to get a point what the market doing, we stick to intra day charts and trade for the day. And scalp the market..
A trader needs to have two different brains working simultaneously to get in deep of the intraday chart to understand whether the markets are showing patterns of selling as indicated by the bigger charts or when the markets are not doing so then evaluating whether to trade with the short term current patterns or wait for these patterns to get in sync with the bigger time frames.
So for day trading it would be for 50-150 points as market has an Average Daily Range of 150 points. So on an average, we can get 150 points any day.
Maintain minute charts on software like NinjaTrader or Amibroker or Metastock and analyse the past market movements to get an understanding of market movements, and its habits. Get Min data for banknifty futures from here.
Those who are working or don’t have time to watch the Markets intraday, can maintain a EOD chart on the software.
Visit the link to download Nifty Index & Index Futures Data (EOD OHLC Data – Open, High, Low & Close).
When to Trade Positional & When to Trade Intraday?
There are times when the markets are forming big setups and patterns on big charts (EOD Charts) so it becomes important for traders trade these big moves on big charts to earn big profits. These situations necessarily requires traders to look the market in bigger context and keep entering the markets in bigger way by keep on pyramiding with the favorable moves. So it becomes important to know why you are trading it? Like we have a rule while trading stocks that we never let our trading calls becomes our long term investments. Similarly we don`t have to let our day trade become our positional trade because we are fearful in booking our loss in intraday.
Therefore, it is always important to know whether you are planning to enter for intraday or positional?
Read the story of inspiration of a young dreamer who started back in 1985 at the age of 25 years with limited capital of only Rs. 5000 but with big dreams, who spent day and night to understand the rules of the games, whose courage and dedication made him a billionaire & surely one of the most followed and respected investor / trader in India & across the globe. The one who broke all the fixed rules of trading and laid down the foundations for others to follow.
I am not a Day Trader
Some of you might be thinking this while reading the above thoughts but really intraday charts are very important because they actually help us in managing our risk. We cannot take up a risk of 200 points on Nifty futures when trading with say 750 or 15000 units. This will be a risk of Rs. 1,50,000 or Rs. 3,00,000 on a single trade.
So, whenever we are planning to achieve on trading the big lot size of the market, the only way to stay in the market is by managing the risk. So, the idea is to take risk of say average 20 points on 750 units or 1500 units and take risk of Rs. 15,000 or Rs. 30,000 by entering the markets on the smaller charts (1 Min, 5 Min or 15 Min) by having a big time view on the bigger time frames.
Even the risk stated here can be further reduced and later turned to “Risk-Free Trade” by following the rule of pyramiding by entering the trade in different tranches whenever the earlier position shows you a profit. Such a strategy can help you to trade any number of lots or quantity to attain biggest profits possible at No Loss.
Pyramiding Rule for Entering & Exiting the Market – Coming Soon
Why Not to Trade Bank Nifty Futures?
Bank Nifty Future has a higher beta than Nifty i.e. it is more volatile than Nifty Futures or Nifty has a small Average Daily Range as compared to Bank Nifty.
For new beginners, starting with Nifty Futures will help them understand the mechanism and working of futures market as Nifty is less volatile than Bank Nifty. So, once you get insync with the trading, start to make profits, understand how to enter the market, where to place stop losses, how to exit the trade and more importantly learn to maintain calm and control on your emotions while trading then you can further extend your trading plan to trade bank nifty futures. Then its OK to trade high beta index like Bank Nifty.
Beginners can start with Nifty Futures then later supplement your study to Bank Nifty Futures.
Know Your Market
Deciding the parameters to trade is one side of the game and getting in and applying into the market successfully is the other and yes more important one. So, before gushing in and entering the trading arena, the first and foremost thing that a trader should do is “Know Your Market”.
Back-test each technical tool you know to the bank nifty futures market and see what really works for you. Try to filter out the tools which you feel fits under your belt like retracement, double or triple tops or bottoms, etc.
The idea here is to be an expert in one market. So, its better to know more about a market then knowing some about many markets. So, start analyzing the markets on bigger as well as smaller charts and try to understand the habits and characteristics of BankNifty Futures.
Read Article: Part V – Getting Started With Trading – Know Your Market
Control Your Emotions
Don’t trade when the markets are violent. It always make sense for traders (specially new ones) to enter into a trade when the markets are silent and exit when the markers becomes very violent. Trading volatile markets surely gives a trader an excitement and eagerness to make big profits but even many professional traders avoid trading when markets are very volatile and specially on some news days or events.
Excitement within the traders even force them to trade the violent markets by entering the long trades when the markets are having a big blow up and forgetting all their money management rules of trading with close stop losses which surely forces them to enter the market at wrong time and at wrong prices and incur big losses.
Our ultimate objective of trading Nifty Futures is to develop the trading skills that can help us be consistent in our analysis, trade implementation, execution, staying in the trade and exiting the trade with big profits in hand. So develop the real insight to trade pre-determined setups or patterns and places to get some confirmed points with big volumes and lower risk edge.
The objective is to start with Trading with one lot size of nifty futures to learn the mechanism and reach to the higher end of the Trading volumes of 750 or 1500 units or even more than that and later start with trading Bank nifty futures.
So, start with Trading one lot, make consistent profits, double your margin money and keep on increasing your lot size to trade without adding any fresh capital. So, the initial objective of any new trader trading with one lot size should be to earn Rs. 47,000 in profits so that you can achieve trading two lot size without putting any new capital. So, to achieve this objective, traders need to achieve a profit of approx. 626 points to earn Rs. 47000 in profits and reach to target of trading two lot size.
Once you achieve trading two lot size of BankNifty futures, we need to get only 313 points in profits to achieve the target of reaching three lot size and then 209 points to earn 47000 profits with 225 units and then157 points with four lot size (4x 75 units) to earn Rs. 47,000.
Suppose with trading 1 lot, you have developed your trading skill and getting consistently on an average 50 points in a trade i.e. making Rs.3750 per trade then you need not to make wide changes in your trading rules but what you need is just increase the lot size to trade (from the profits you make) and reach the higher edge of trading with say 4 lots and making some Rs. 15000 per trade.
Or even if you starts to make say 30 points per trade with 4 lot size, the. It will be Rs. 9000 per trade.
Double reward and that too with half efforts.
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