As a financial markets professional, I have come across various derivatives traders. Lot of traders have lost heavily while few have made their fortune from derivatives. I am sure all of us know “How to loose money” but one thing all of us are eager to know is “How to make money”. Here, in this post, I am going to share some of the secret techniques of few successful derivatives traders that I come across. I was surprised to see that these techniques are common among these few profit making traders but totally absent in others. So, we must learn and adopt these in our daily trading and take benefits.

So without any further discussion, here we go with techniques….

Use Excel for building strategies

Excel is a great tool for building mathematical models and data linkages. Most of the trading software gets integrated with excel with just press of a button. Normally you can right click on a Market watch window of a trading software and press ‘Open in Excel’. The live updating market watch will open in excel. Subsequently you may create your window by linking cells say ‘=S24 – B3’. Derivative Traders use excel to make various models and then observe the trends of their results. Some of the simple model could be Calender spread trading i.e {1m futures price – 2 m futures price}

Multiple strategies

Successful derivatives traders do not follow single call but keep a track of multiple strategies. These strategies are normally formed with a combination of cash market, futures and options. This gives a trader with plenty of option for getting into the market rather than sticking to one or two calls. They normally avoid calls or strategies with unlimited loss potential and if etal they take, they keep a thought through risk containment measure. It could be a stop loss level, buying an option of far away expiry price, taking a hedged position, etc.

Back test with past data

Normally, the next steps is to back test their strategy. While they build a strategy, it is a part to back test the same with some previous random data. It gives them an insight of the cashflows in various scenario of market movement. A common belief is that you need a advanced software for Back testing, but it is not true. A simpler way is to download the data from exchange and take few extreme days and few regular days. By inserting this data manually in excel sheet, any trader can do a basic test for his strategy. This is a big saviour especially when some drastic past repeats itself.

Choose cheapest broker

A successful trader is very concious about the costs. Each penny saved is a penny earned, so they negotiate hard for brokerages with their brokers. However, with upcoming of Discount brokers like Zerodha, RKSV, Tradejini, the brokerage costs have substantially came down. This not only bring down the cost but also lowered the break even point for each trade. So now they can take positions with smaller targets and thus the chances of profit making trades increases.

Limited scrips

A successful traders generally trades in less than 10 scrips. Rather in certain cases, I have seen them trading in 1-2 scrips only. This helps them to have a better understanding about the DNA of scrip. Diversification as the risk containment measure is normally kept aside and combination of derivatives contracts are used for the same. Another advantage of trading in limited scrip is the lesser utilization of margin. The margin utilization reduces with creation of portfolio as per exchange margining. This feature if utilized properly reduces the overall risk and thus overall margin requirement on the positions, which has a strong impact of ROI.

Hope the same insights will be used to better your trading techniques and help your become a better trader. Please write your feedback as comment and subscribe to our newsletter for more such updates.

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