May 21, 2024

How Important is Risk Management in Futures Trading: 5 Tips For Newbies

Futures trading means buying and selling the underlying asset necessarily on the expiry date at a specified date. As futures values and profitability depend on other underlying assets such as stocks and commodities, they hold some inherent risk.

In this article, you’ll get some tips on how you can reduce the risk in the futures and why it is important to do so.

How to Reduce Risk in Futures Trading?

Intraday Futures trading comes with different risks such as price risk, volatility risk, leverage risk, etc. Here are the different strategies that you can use to reduce risk and increase profit potential in futures trading:

1. Spread Trading

In this style, you can buy the same underlying asset’s futures contracts having different expiry dates and thereby you can earn from the price differential. Another way is to buy two related underlying assets futures such as the Nifty Bank index and the Nifty Financial Services index contracts.

This way you can earn from the spread between the two contracts. Also, you can minimize the risk by related positions offsetting each other’s loss and profit.

2. Going Long

Going long means buying futures when you expect the price of the underlying asset to rise before the contract expires. If it rises, then you can earn unlimited profit and otherwise, you are exposed to unlimited losses which can be managed by setting up a stop-loss.

3. Going Short

In futures trading, going short means selling futures when you think that the price of the underlying asset can fall before it expires. If the price falls, then you can earn limited profit as the price cannot fall below zero.

4. Breakout Trading

In this trading strategy, you will look out for the new price that a futures contract has now touched for quite a long time. This will help you analyze the upcoming trend and you can take the position accordingly.

5. Pullback Trading

In pullback trading, you can buy the futures contract when the price of the asset is low and is expected to rise in the future. The idea is that futures contracts show price reversals in the short run before actually showing the price signal for the long run.

Benefits of Managing Risk in Futures Trading

Analyzing and reducing the risk in futures trading helps in different ways which are as follows:

1. Save Capital

By analyzing the futures contracts and using different trading strategies, you can save on the invested capital. You can also set stop-losses to reduce the risk of losing the invested money.

2. Needed Position Size

You can select the appropriate position size of futures contracts according to your risk appetite and how much you can invest. This ensures that you take the positions in any futures contract according to your profile.

3. Efficient Risk-Reward Ratio

With the use of different trading strategies, you can strike a balance between risk and reward in the futures. You can choose risk according to the potential profit that a futures contract can generate.

Conclusion

In futures trading, you can use different strategies to manage risk such as spread trading, going long and short, and breakout and pullback trading. These strategies will help you save on capital and you can choose the appropriate position size according to your choice. Also, you can achieve a balance between the risk and return from each trade.

If you are looking for an app that allows you to efficiently help in futures trading, then you can download the Dhan Options Trading App.

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