GENERAL GUIDELINES FOR TRADING IN FUTURES & OPTIONS FOR SMALL INVESTORS

FUTURES
1. Trade only INTRADAY for Nifty Futures. The intraday rise or fall in nifty futures is good enough for any traders to make money.

2. DO NOT carry any OVERNIGHT position in Nifty Futures, unless & until you have gained sufficient profits in trading.

3. Enter Stock Futures only after gaining sufficient experience in BTST trades.
OPTIONS
Option Trading is highly speculative & risky trading, where one can earn as much as 100% of the investment in a single trading session, at the same time, risking the amount to get halved within no time. The option premium will see erratic swings intraday in line with the movement of prices of stocks or index. One has to take extra caution while trading in options.

I give herebelow the general GUIDELINEs to be kept in mind while initiating option trades from small investors' point of view:

1. As the Option trades are speculative in nature, the amount allotted for the same should be a small portion of the investible funds of the members. Depending on the investible funds with you, the amount allotted should be in following 3 categories: (A) Rs 15000-30000, (B) 31000-60000, (C) 61000-90000.
2. Once you allot an amount under any of the above 3 categories depending on your investible funds, any increase in the funds allotted should be STRICTLY out of the profits earned.

3. Allotment of funds for any trades should not exceed 20% of the capital allotted for options  OR Rs 6000 whichever is higher. Placing all the money in one single trade is STRICT NO NO.

4. The exposure of the funds for outstanding option position any time should not exceed 60% of the original funds allotted.

5. Investors should never worry about booking loss in any unfavourable trade, as when we expect good profits on favourable trades, loss on unfavourable trades should also be taken for granted.
6. If the recommendation under Trading Calls is for buying call/put below a particular rate, members should not buy it above that rate, though the target may be reasonably high from that level. So if the recommendation is to buy a call below 90, the trade should be not more than 1 rupee above that rate, and can be any amount below 90.

7. All the Trading Calls will have the Target stipulated. But it is absolutely not necessary that one should wait for that target to reach. Booking profits much below the target will cultivate Profit Booking Habit among members, and it is always better to book profits on all trades as quickly as possible.

8. STOP LOSS will not be stipulated for any trades, and members should automatically square off any unfavourable trades if the loss reaches 35% of the premium paid.

9. Starting point for Option Trades can either be Category A or B, and members may go to Category C only after gaining some favourable experience.

Golden Rules

1. Always do your analysis before trading.

2. Always have a clear and reasonable idea of your objective. 

3. Never trade on emotions or other people’s forecasts. 

4. Buy at support and sell at resistance. 

5. Always trade with “STOP LOSS”. 

6. Never hold a losing position over night without SL. 

7. Never add to a losing position. 

8. Never risk more than 5 % of your trading capital on one trade. 

9.If you are breaking any of the above rules …STOP TRADING…

because you are out of control

How retail investors lose money

The reason is simple - a retail investor is driven by greed or fear. Never logic.

• Retail investors are always the last to enter a bull run
• "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
• When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
• Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
• At this time, the retail investor starts buying as he does not want to miss out the "action"
• The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
• This is also the time when "smart money" starts moving out
• When a correction happens, it is usually quite severe
• The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to "catch a falling knife"
• At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
• Sometimes the retail investor will do nothing but wait for the markets to rise
• When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run

Other facts

• In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
• Those who have never participated when the rally started will invariably jump in towards the end of the bull run
• Retail investors rarely follow stoplosses. Circumstances eventually force them to take a bigger loss
• Lastly, retail investors spend an insignificant amount of time researching an investment as compared to buying a mobile or fridge.