Insights About Index Trading : Basics and Some Patterns for Profitable Trades

Index trading basically refers to execution of trades in the market indices. The major Indian market indices are Nifty50 and Bank Nifty. Sensex is also a major index but it cannot be traded. One can purchase the lots for Nifty and bank Nifty on the basis of his or her capacity. Firstly there are two ways inside index trading. First one is to take a position in the index directly. This means that a person has to directly buy Nifty50 and Bank Nifty. On the other hand the profit or loss will be directly calculated from price changes in such indexes. 

Futures and Options Trading

For example if a person has bought Nifty50 at 17000 and the Nifty50 increased by 100 points and went to 17100 Levels. This means that the profit per Nifty bought is 100 Rs. hence this is called direct buying of indexes. This method requires you to pay the entire amount for these purchases. Hence as per the lot size and current prices, a person has to pay 855000 Rs. i.e. (17100*50 – lot size). Hence this is the major problem in such circumstances. The prices of Nifty50 and Bank Nifty are so high that purchasing them in lots requires a lot of capital investment. Hence another alternative to index trading was formed which is known as options. 

In this method one has to pay a margin amount of the entire size of the lot. Also the returns are not directly related to the price changes in Nifty50. The reruns are based on the premium amount fluctuation. Yes, such potions work on premium. The changes in their prices are based on the movement of indexes. However the fluctuations and volatility in options is very high. One has to be extremely careful while trading in options. The reason behind it would be explained further.

Future Index Trading

As discussed above the future index needs a payment of the entire amount of lot size. Also the future trades for Nifty50 expire on the last Thursday of every month and for Bank Nifty it is Thursday of every week. Hence the volatility is definitely present in these modes of trading. 

Firstly if a person is trading in such a mode, then he or she needs to understand the importance of support and resistance levels and weightage of all stocks in indexes. One has to strictly abide by the support and resistance levels. 

Practical Scenario

For example let’s discuss a scenario where a person has bought one lot of Nifty50. In the current scenario if analysed properly there are 4 levels which are very crucial for Nifty50 Movements. They are 15800, 16200, 16600 and 17200. These are the price points around which Nifty50 has taken a definite reversal in the last 6 months. Thus the trades need to be executed around these levels only. For example in today’s market one can take a selling position at 17150 levels with a risk of 70 points (SL at 17220) and a profit till 16600 levels. Hence this is how one has to trade in indexes for a better return probability.

Also it is very important to notice the movement of every major stock such as Reliance, TCS, HDFC Bank, Wipro, Infosys etc. These stocks have the capability of turning the market direction at any time. Along with this one has to definitely work on analysing the SGX Nifty or Singapore Nifty for getting a better idea about further movement of Nifty50. Hence all such factors put together can offer better trades and high chances of earning profits.

Options Trading

It is one of the most risk associated modes of trading. It can give you returns up to 1500% in a day. Yes 1500% in one day and even take away all your money traded in just a few minutes. This is why option trading is very risky and has the highest return probability associated with it. This mode of trading is preferred for the experienced traders as it will definitely take away money from newbies if traded without proper knowledge. 

In the initial phase it is advised to invest just that amount of money which you are ready to lose. The reason is this mode of trade can be better learnt with self practical experience. However there are some tricks which can lead you to safer trades.

Option Strategy

In options trading there are two types of trades. One is a monthly position and another is a weekly position. As per their names the trade time frame lasts for month and week respectively. Now for newbies monthly hold is better as it would take you through a lot of changes and fluctuation in premium amount which can be useful for learning experience. 

However some tricks for monthly positions are : Always hedge your trades. Yes one should create a hedging position which trades into monthly expiry of options. This gives you a very good probability of returns. If one has taken a buying position in Nifty then the same position should be taken on the support level for Nifty50. This means that with such hedging your loss is limited to the amount invested in either trades  but with Nifty50 moving in either direction one can get a chance for squaring off the opposite position (which is running in loss) and hold the profitable trades.

Weekly Option Trading

In weekly trades there are few strategies that can be helpful in trades. One is to take a position on Tuesday or Monday of every week. The reason is their expiry on every Thursday. Second is to stay away from trading into positions of the same week on expiries. In other words one should never take position in a trade which expires on the same day (Trading on Thursday). The reason is that premiums are very volatile before 11.30 Am to 12 Pm. However, after that the premiums (based on pricing) suddenly go down due to the expiry coming soon and the market direction (if opposite than trade position). 

One last factor to note is that always take 2 to 3% return and exit the trade if you don’t have the appetite to lose money. Yes your returns can definitely be unlimited if the market turns in your face but taking 3% return everyday home equals to 15% return in one week which equals to approx. 70% return in a month. This is not at all a small amount of return to take home every month.