Futures Trading: Concepts & Strategies

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Open interest is more than just a number — it gives insight into the market's participation and conviction.

• When OI Increases:
  It means new positions are being created. If prices are also rising, it suggests bullish sentiment. If prices are falling, it indicates fresh bearish positions.
   
• When OI Decreases:
  It means existing positions are being closed. Traders are exiting the market, reducing their risk or exposure.
   
• When OI Remains Stable:
  It shows that there's no change in the number of open contracts. Existing traders are still in the market, but no significant new participation is occurring.

This information helps traders judge the strength of price moves. For example, a rally with increasing OI is more trustworthy than a rally where OI is falling (which might just be short covering).

The price of a futures contract is not fixed by the exchange.

It is determined by market participants (buyers and sellers) through real-time trading on the exchange.

Just like stocks, futures contracts are listed on an order book.

• When demand to buy increases, price goes up
• When supply (selling pressure) increases, price goes down

This process is called price discovery and happens moment by moment as traders place orders based on:

• Their view of the future
• Spot market conditions
• Risk preferences
• Arbitrage opportunities

While buyers and sellers set the price through their actions, several factors influence where the price settles:

1. Spot Price of the Underlying Asset: Futures generally trade close to the spot price  but not exactly equal.

2. Time to Expiry: The further the expiry date, the more time for uncertainty. This affects pricing.Important: Unlike options, futures have NO TIME DECAY. The time factor affects pricing through cost of carry, not through premium erosion.

3. Cost of Carry :This includes:

• Interest rates (cost of borrowing to buy the asset)
• Storage costs (for physical goods like oil or wheat)
• Insurance and transaction costs

4. Expected Future Price or Sentiment:If the market expects prices to rise, futures may trade higher than spot and vice versa.

1. Core idea
Futures prices reflect today’s spot price plus (or minus) the “cost of carry” until delivery. That cost of carry bundles financing rates, storage, insurance, convenience yield, and any expected income from holding the asset.

2. Contango (futures price?>?spot price)

• Futures trade at a premium because carrying the asset is costly or interest rates are high.
   
• The longer the time to expiry, the higher the quoted price tends to be.
   
• Typical in markets like oil or metals that are expensive to store.
   

3. Backwardation (futures price?<?spot price)

• Futures trade at a discount because holders earn a convenience yield (they need the physical asset now) or inventory is tight.
   
• Longer?dated contracts are usually cheaper than near?term ones.
   
• Often seen in perishable commodities or when there is short?term supply pressure.

Commodity futures may require knowledge of supply chains, while index/stock futures require financial analysis.

Here are widely used approaches:

Directional Trading:

• Go long if bullish, short if bearish

• Simple but risky — needs good timing & risk management

Hedging:

• Use futures to protect portfolio or business exposure

• E.g., short index futures to hedge long stock positions

Spread Trading:

• Long one futures contract, short another

• Example: Buy March crude oil, sell April crude oil (calendar spread)

Pair Trading:

• Long one stock futures, short a related one

• E.g., Long Reliance, Short ONGC based on valuation gap

Statistical Arbitrage:

• Quant models using mean reversion, cointegration, and volatility spreads

Futures contracts have fixed expiration dates, typically monthly or quarterly. If a trader wishes to maintain a position beyond the current contract’s expiry, they must perform a rollover. This involves closing the existing position in the expiring contract and opening a new position in a later-dated contract, usually the next one in the series.

What is Rollover?

• Close the current month contract
   
• Open a new position in next month’s contract

Example:

You're long in Nifty July Futures.

• Before expiry, you sell July and simultaneously buy August Futures
   
• This is called a rollover
   

Roll Cost:

• If August contract is priced higher → rollover cost
   
• If it’s lower → rollover credit
   

Rollover activity is visible in:

• OI shifting from near-month to next-month contracts
   
• Calendar spreads traded by pros

Futures trading exists to serve two primary goals: hedging against price risk and speculating for profit. While the instrument is the same, the intent behind its use makes all the difference. Futures also play a key role in liquidity and price discovery in financial markets.

1. Hedging: Protecting Against Price Risk
Hedgers use futures to stabilize costs or revenues. These participants are often producers, consumers, or investors with exposure to real assets or portfolios. Their goal isn’t to profit from futures — it’s to reduce uncertainty.

Example A: Crude Oil Producer (Seller Hedge)
A company extracting crude oil fears prices may fall in the next three months. To lock in current levels, it sells oil futures expiring in that timeframe.

• If prices fall, futures make a profit — offsetting lower physical sale prices.
• If prices rise, the company earns more on oil but loses on futures. Either way, the outcome is more predictable.

Example B: Airline Company (Buyer Hedge)
Airlines spend heavily on jet fuel. If fuel prices spike, costs soar. To protect against this, the airline buys fuel futures at a fixed price.

• If fuel becomes expensive, futures profit covers the extra cost.
• If fuel gets cheaper, the airline loses on futures but pays less in real-world purchases.

Financial Hedging
Institutional investors also hedge using index futures. For instance, an investor holding ?10 crore in stocks might short Nifty futures if they expect short-term market weakness. Gains in futures help offset losses in the portfolio.

2. Speculation: Trading for Profit
Speculators have no interest in owning or using the underlying asset. They trade futures purely to profit from price moves — up or down — using leverage.

Example A: Long Position on Gold
A trader believes gold prices will rise. Instead of buying physical gold, they buy gold futures using margin.

• If gold rises, they profit from the futures contract.
• If gold falls, losses occur — and since leverage is involved, both gains and losses are magnified.

Example B: Shorting the Market
A trader expects the Nifty index to drop due to weak economic data. They short Nifty futures (sell now, buy later). If Nifty falls, they profit. Futures make shorting easier and more flexible than in the spot market.

3. Hedgers and Speculators Depend on Each Other
Hedgers need counterparties to take the opposite side of their trades — and that’s where speculators step in. Without them, markets would lack liquidity.

• A wheat farmer hedging by selling futures needs a speculator to take the opposite bet — that prices will rise.
• This interaction ensures trades are executed quickly and efficiently.

Speculators provide liquidity, while hedgers bring real-world economic activity. This synergy makes futures markets dynamic and continuous.

4. Price Discovery and the Role of Arbitrageurs
Futures trading contributes to price discovery — the process of finding a fair market price based on supply, demand, and expectations.
While speculators help set prices through active trading, arbitrageurs enhance this process by eliminating price gaps between markets:

• They monitor for temporary mispricings between futures and spot markets
• They exploit these gaps, pushing prices back into alignment
• This keeps futures prices accurate and reflects true underlying value
• Together, arbitrage, speculation, and hedging drive a more efficient and transparent market.

In Summary

• Hedgers use futures to manage risk
• Speculators aim to profit from price moves
• Arbitrageurs refine prices across markets
• All three ensure futures markets are liquid, fair, and efficient

Futures trading isn’t just about making quick profits — it’s a critical part of how modern markets function, allowing producers, investors, and traders to manage risk and discover prices effectively.

Futures trading lets you speculate on or hedge against price movements in markets like commodities, currencies, indices, and interest rates. But because futures are leveraged instruments, it's critical to approach them with preparation and discipline. Here’s a step-by-step roadmap for beginners:

1. Understand What You’re Trading
Before placing a single trade, learn the basics:

• Futures are contracts to buy or sell an asset at a future date, not the asset itself.
• They are settled daily, and profits or losses are marked to market.
• You only pay a margin, not the full contract value — this increases both risk and reward.
• Contracts have fixed sizes, expiry dates, tick values, and may settle in cash or physical delivery.

Also, clarify your intent:

• Hedging: Protect against price swings
• Speculation: Profit from expected price movements

2. Choose a Regulated Broker
Your broker connects you to the futures exchange, so choose wisely:

• Must be licensed and regulated in your country
• Should offer access to global futures markets
• Clearly disclose fees, margin policies, and settlement rules
• Provide risk tools like stop-losses and real-time tracking
• (Bonus) Support demo trading or algorithmic trading via APIs

Avoid unregulated brokers offering excessive leverage or vague terms.

3. Open a Futures Trading Account
Futures trading often requires a separate activation step:

• Submit identity and address documents
• Declare your income, experience, or financial status
• Sign disclosures acknowledging the risks of derivatives
• In some regions, you may need to meet minimum net-worth or experience criteria

Once approved, your broker enables access to futures or the derivatives segment.

4. Fund Your Account and Understand Margin
You don’t need the full contract value — just the initial margin, usually 5–20%.

• Maintain a buffer above margin to handle daily price moves
• If your balance falls below the maintenance margin, your broker may issue a margin call
• Failure to respond could lead to forced liquidation of your positions

Margin allows leverage, but also means small moves = big impact. Always size positions wisely.

5. Learn the Risks of Leverage
With futures, leverage amplifies both profits and losses:

• A 2% move in the market could translate to a 20% gain or loss on your margin
• If you don’t use stop-losses or risk limits, losses can exceed your initial capital

Key terms to understand:

• Initial Margin: Required to enter a trade
• Maintenance Margin: Minimum to keep it open
• Liquidation Level: Where the broker auto-closes your position

Risk control is not optional — it’s survival.

6. Practice With a Demo Account
Before trading real money, use your broker’s paper trading or demo mode to:

• Place virtual trades in real-time
• Understand how margin and mark-to-market adjustments work
• Test strategies safely
• Get used to placing market, limit, and stop orders

Even if you're experienced in stocks or forex, futures mechanics are different — demo trading helps you adjust.

7. Pick One Market to Start
Start simple. Choose one or two liquid markets like:

• Equity indices (e.g., Nifty, S&P 500, DAX)
• Commodities (e.g., crude oil, gold)
• Major currencies (e.g., EUR/USD)

Study:

• Contract size, tick value, and expiry
• Daily volatility and price ranges
• When the market is most active (aligned with your timezone)

Avoid jumping into illiquid or unfamiliar contracts — stick to well-traded markets until you're confident.

8. Start Live With Small Capital
Once you’re ready for real trading:

• Start with the smallest contract size (micro or mini futures, if available)
• Use stop-losses and stick to daily loss limits
• Avoid overnight positions until you’ve built confidence
• Log every trade — record why you entered, how it went, and what you learned

The goal isn’t to make fast profits — it’s to build skill while protecting your capital.

Technical analysis is a core part of most futures trading strategies, especially for short- and medium-term traders. Since futures markets are liquid, fast-moving, and driven by price discovery, technical tools help traders identify entry and exit points, trends, and risk levels — all by studying price charts and volume instead of fundamental data.

Why Technical Analysis Works in Futures
Futures prices reflect all available information — news, sentiment, macro data — and that gets priced in almost instantly. This shows up directly on charts. Because traders tend to react similarly in repeated situations (fear at lows, greed at highs), patterns form, and technical levels gain importance. Even institutions and algorithms use technical zones like moving averages and support/resistance for execution, making them self-reinforcing.

1. Chart Patterns: Visualizing Market Psychology
Chart patterns show how traders have behaved in the past and help anticipate future moves. Common patterns include:

• Head and Shoulders, Double Tops/Bottoms – often signal reversals
• Triangles, Flags, Pennants – indicate continuation or breakout zones
• Breakouts with volume – point to strong momentum trades

Futures traders use these patterns to plan trades, especially when confirmed by volume and price action.

2. Technical Indicators: Measuring Trend and Momentum
Indicators use price and volume data to spot trends, reversals, or volatility shifts. Common ones include:

• Moving Averages – define trend direction and support/resistance
• RSI and Stochastic – help identify overbought or oversold zones
• MACD – confirms trend strength and crossovers
• Bollinger Bands – show volatility compression and breakout potential
• ATR – used for setting dynamic stop-losses or sizing positions

No indicator should be used alone — the best traders combine them with chart structure and market context.

3. Volume and Open Interest: Confirming Conviction
Futures markets offer unique transparency in both volume and open interest (OI). Together, they help judge the strength of price moves.

• High volume confirms the move is backed by strong participation
• Rising OI with rising price = new longs, usually bullish
• Rising OI with falling price = new shorts, often bearish
• Falling OI = traders exiting positions (profit booking or stop-outs)

For example, in crude oil futures, a price rise with increasing volume and OI usually signals strong bullish conviction.

4. Support, Resistance, and Key Price Levels
Support and resistance zones are where prices often pause, reverse, or accelerate. Traders use these to:

• Set entries and exits
• Place stop-loss orders
• Avoid trading into known resistance or support

These levels can be previous day’s highs/lows, weekly pivots, trendlines, or round numbers like 10000 or 2000 — often respected due to institutional flows and option interest.

5. Time Frame Selection Is Critical
The choice of time frame depends on your trading style:

• Intraday traders use 1 to 15-minute charts for precision
• Swing traders prefer 1-hour or 4-hour charts for spotting trends
• Positional traders rely on daily or weekly charts for macro views

Many successful traders use multiple time frames — for example, identifying the trend on a 1-hour chart and entering on a 5-minute pullback.

6. Technicals in Algorithmic Trading
Algo trading in futures often runs on technical logic:

• Moving average crossovers
• RSI or momentum-based filters
• Breakout systems using price range or volume
• Volatility compression-expansion models

Because technical signals can be expressed in code, they are ideal for backtesting and automation — a big reason why they’re central to quantitative futures strategies.

Building a futures strategy isn’t about chasing tips or patterns — it’s about following a clear, tested process. Futures are fast and leveraged, so your strategy needs discipline, data, and risk control.
1. Define Your Goal
 Decide your intent:

• Are you speculating, hedging, or arbitraging?
• Are you trading intraday, swing, or positionally?

 This shapes your strategy and market choices.

2. Pick the Right Futures Market
 Choose contracts that match your capital and goals.
 Look for:

• High liquidity
• Suitable volatility
• Reasonable contract size

 Popular choices include crude oil, equity indices, and gold.

3. Understand Market Behavior
 Study how your chosen futures contract moves.
 Check:

• Reaction to events (e.g., EIA, CPI)
• Volatility patterns by time of day
• Daily range (use ATR)
• Correlation with other markets

4. Define a Trade Setup
 Create a rule-based setup. Examples:

• Moving average crossover
• RSI-based mean reversion
• Volume breakout after news

 Combine fundamentals for bias and technicals for timing.

5. Write Entry, Exit, and Stop Rules
 Your rules must be clear:

• Entry condition (e.g., breakout + RSI > 60)
• Stop-loss (e.g., 1.5× ATR)
• Exit logic (fixed target or trailing stop)

6. Risk Management Plan

• Risk max 1–2% per trade
• Use stop-losses
• Maintain a margin buffer
• Avoid emotional decisions or revenge trades

7. Backtest or Paper Trade
 Test the strategy on past data or in demo mode. Track:

• Win rate
• Drawdown
• Risk-reward

 Use tools like Python or trading platforms.

8. Start Live – Small Size
 Begin with the minimum contract. Focus on:

• Discipline
• Trade logs
• Weekly review

 Only scale once consistent and profitable.

9. Review and Improve
 Markets change — so refine your strategy.

• Study failed trades
• Adjust for new volatility
• Test tweaks in a sandbox before going live

Bottom Line:
 Keep it simple, rule-based, and risk-aware.
 Start small, test thoroughly, and refine with feedback. In futures trading, it’s not prediction that wins — it’s process and discipline.

Open Interest (OI) is the total number of active futures contracts that have not been settled yet. These contracts are still "open" — meaning the positions haven’t been squared off, closed, or expired.

Think of it like this: every time a buyer and a seller agree on a new futures contract, one unit of open interest is created. That contract will remain in the count until either the buyer or seller exits (by squaring off or through expiry).

How Open Interest Is Created or Reduced
To understand how open interest works, imagine the following scenarios:

• New Trade Between Two Fresh Participants:

 Trader A buys 1 lot of Nifty Futures from Trader B, who is also entering a new position.
 → Open Interest increases by 1.

• One Trader Exits an Existing Position:

 If Trader C had an open position and now sells to someone who is closing their own long position,
 → Open Interest decreases by 1.

• Transfer Between Existing Positions:

 If one trader with an existing position transfers it to another trader who is also adjusting an existing position (without net new exposure),
 → Open Interest remains unchanged.

At the expiry of the contract, all open interest resets to zero because all positions are either:

• Settled (cash-settled or physically delivered), or
• Rolled over to the next month (by creating equivalent opposite positions in the expiring and next contract).

These two are often confused but serve different purposes:

• Open Interest shows the total number of open contracts at a point in time. Think of it as the stock of outstanding positions.
   
• Volume shows the number of contracts traded during a day. Think of it as the flow of trading activity.

A contract might be traded many times in a day (high volume), but unless new positions are created, open interest won’t change. Conversely, a low-volume day could still add to OI if new traders enter and hold.

Traders often look at both price movement and OI changes together to understand what’s really going on:

• Price Up + OI Up:
  New buying interest is coming in. This is generally bullish — fresh longs are being created.
   
• Price Up + OI Down:
  Indicates short covering. Traders who were betting on a fall are closing their positions. The rally might not be sustainable.
   
• Price Down + OI Up:
  New shorts are entering the market. This is bearish — fresh selling pressure is building up.
   
• Price Down + OI Down:
  Suggests long unwinding. Traders who were bullish are exiting. This can point to a weak downtrend.