The financial market is full of diverse instruments that you can trade, invest and grow your wealth with. Among these, Nifty futures is gaining popularity among traders looking to capitalise on the rising trend in the Nifty 50 index. This index, comprising the top 50 companies listed on the National Stock Exchange (NSE) of India, represents a significant portion of the Indian stock market's performance.
So, what are Nifty futures, how can you trade in them and what strategies can you employ? In this blog, you will get a comprehensive understanding of all this and how to analyse them effectively.
Nifty futures are derivative contracts that derive their value from the Nifty 50 index. These contracts obligate both the buyer to purchase and the seller to sell the underlying index at a predetermined price on a specified future date. When you trade Nifty futures, you are looking at the overall market's movement as shown by the Nifty 50 index rather than just individual stock movements.
Let’s understand how Nifty futures work. These contracts have three key components, including:
1. Contract Size: Each Nifty futures contract represents a lot size of 25 units of the Nifty 50 index. This means when you trade one contract, you're trading 25 units of the index.
2. Expiry Date: These contracts expire on a specific date, usually the last Thursday of the contract month. When a contract expires, it must be settled, meaning the positions are closed, and any profits or losses are realised. You can choose from contracts that expire monthly or quarterly.
3. Pricing: The price of a Nifty futures contract is derived from the current value of the Nifty 50 index. So, if the Nifty Index rises, the value of Nifty futures also rises and vice versa.
Nifty 50 futures offer several distinctive features that make them attractive to traders:
|
Feature |
Description |
|
Leverage |
Control large positions with a relatively small margin, amplifying potential profits. Leverage allows you to take significant market positions with a smaller capital outlay, enhancing potential returns but also increasing risk. |
|
Liquidity |
High trading volumes ensure ease of entry and exit, providing flexibility and efficiency in trading. The Nifty futures market's liquidity ensures that you can trade quickly and at competitive prices. |
|
Hedging |
Effective tool for managing risk and protecting portfolios against adverse market movements. You can use Nifty futures to hedge against potential losses in your stock portfolio, thereby reducing overall risk. |
|
Transparency |
The Nifty 50 index's composition and calculation are well-defined, ensuring clarity in trading. The transparency of the Nifty 50 index provides confidence in the accuracy and reliability of the futures contracts. |
Apart from having a trading account with a broker, you must also have a trading strategy to get started with Nifty futures. A well-defined trading strategy can go a long way in improving your chances of success while trading. Let’s take a look at some of the simple strategies that you can adopt:
1. Trend-Following Strategy
Under this approach, you can identify whether the market is going upwards or downwards and try to trade in the same direction. This strategy helps you take advantage of ongoing market movements for potential gains.
2. Range Trading Strategy
Here, you must try to identify price levels at which the market tends to reverse direction. You can buy when the price is at a low point (also known as support level) and sell when it is at a high point (also known as resistance level). This allows you to make profits from regular price movements between these levels.
3. Breakout Strategy
Here, you can enter trades when the price moves beyond a specific point, known as a breakout. As per this strategy, you aim for profits if the price continues moving in the same direction as the breakout.
You can further enhance your strategy for Nifty 50 futures trading by learning how to analyse charts.
Start by identifying the overall direction of the market, known as the price trend. If prices are generally moving upwards, it's an uptrend. If prices are generally moving downwards, it's a downtrend. Recognising these trends helps you decide whether to buy or sell.
Next, determine key price points where the index tends to stop falling or stop rising, called support and resistance levels. Support is like a floor where prices tend to bounce back up, and resistance is like a ceiling where prices tend to drop down. These levels help you identify good points to enter or exit trades.
You could also analyse charts using tools like Moving Averages, Relative Strength Index (RSI), and Bollinger Bands. These help you in understanding market conditions better.
1. Moving Averages show the average price over a period and help identify trends.
2. RSI measures how quickly and significantly prices are changing, helping you spot when the market might reverse direction.
3. Bollinger Bands show the range within which the price typically moves, helping you spot potential reversals.
These charts and tools are available on most trading platforms, making it easier for you to implement these strategies effectively. By understanding and applying these concepts, you can make smarter and more informed trading decisions with Nifty futures.
According to the Futures Industry Association (FIA), the National Stock Exchange of India (NSE) retained its position as the world’s largest derivatives exchange by contract volume for the fifth consecutive year in 2023. In the same year, NSE achieved record single-day turnovers of Rs 167,942.47 crores in equities and Rs 381,623.12 crores in equity derivatives.
2023 also saw NSE ranking third globally in the equity segment by the number of trades. In July 2024, the Nifty 50 index crossed the 24,000 mark for the first time, demonstrating its robust performance.
There is growing participation in stock markets in India. This is evident from the number of unique registered investors on NSE reaching over 8.5 crores for 2023 alone. Increasing interest in the stock markets and particularly the derivatives segment has led to improved liquidity in Nifty futures. It underlines the rising level of confidence that investors have in the Nifty index.
Before starting to trade Nifty 50 futures, do estimate the cost of dealing in such contracts. Some of the costs include brokerage fees, exchange fees, securities transaction cost, goods and services cost, etc. These could impact your net profits from trading.
To learn more about Nifty futures, you can explore resources available on Sharekhan Knowledge Centre.
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