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Understanding Stock Market Index Futures

Index futures provide individuals the ability to trade a financial instrument on a regulated exchange to potentially profit from the correct direction of a share market index price move. A futures contract is a standardised contract to buy or sell a commodity or financial instrument at a predetermined price at a specified time in the future.


An index futures contract tracks the underlying share market index. For example, we have the ability to trade the ASX 200 using index futures. The futures contract is called the SPI 200 and is known simply as "the SPI". The SPI is worth $25 per one point move to traders. A $14,400 initial deposit will get you the equivalent of a $180,000 ($25 multiplied by the SPI at 7200 points) balanced portfolio over the top 200 stocks. Ie, the cash value for one contract equals $25 multiplied by the prevailing index point value. With the SPI, you have leverage and the flexibility to trade the overall market up or down. You can also manage your risk twenty-four hours a day using stop-loss orders.


We are able to short-sell index futures. Short-selling is basically the ability to first sell a financial instrument that you do not own, so that you can buy back later at a potentially lower price to profit from a fall in the market. Short-selling is what you would do, if you believe a particular index was about to fall in value.


Traders are obviously not restricted to trading their own home country index. I started trading Hang Seng Index Futures twenty-one years ago and prefer it over the SPI because of the broad intra-day market movements. The Hang Seng Index tracks the changes in the largest and most liquid companies listed on the Hong Kong Stock Exchange. The Hang Seng consists of the following sub-indices: Finance, Property, Utilities, Commerce and Industry.


Small traders can trade the MINI Hang Seng Futures contract, which is one-fifth the size of the main contract. The overnight margins are $3,900 AUD (approx.) per contract and the point value is about $1.86 AUD (approx.) at the time of writing, but will change depending on exchange rates. A major advantage of using the MINI Hang Seng over the large contract is improved lot-sizing increments for smaller traders, money management and reducing your market exposure. You should have a complete strategy that includes the ability to mechanically adjust your lot-sizing based on your current level of allocated funds and/or the current market volatility. If you neglect to do this or something similar, then you risk substantial equity draw-downs. I have seen novice traders overlook this necessary component of a strategy too often resulting in them giving back all their profits because of a few negative over leveraged trades. You must reduce your lot-sizing when experiencing drawdowns and/or increased market volatility else it could be costly.


The most effective way in my opinion of trading index futures is by using researched and pre-tested mechanical trading rules that have first shown positive back-tested results for that particular market. This method removes illogical decisions based on emotions. If you use a mechanical based strategy, then every aspect of trading must be simulated before trading with real money. There are techniques to successfully test complete strategies to avoid the possibility of curve-fitting the results, which I will write about in upcoming articles and will publish on Facebook and Titan’s website. The strategy must be fully automated and the rules should cover entry, exit, position sizing, stop-losses, early exits and any other possible outcomes. If you can successfully develop a complete rule based trading strategy that works, then you can master trading index futures.


Index futures and intra-day trading is favoured by short-term traders because there is no overnight risk, there is normally liquidity and focusing on a single market can hone and specialise your trading skills. Obviously, trading index futures intra-day is only for individuals who understand that with the potential for high rewards there is higher risk.


Titan Securities is an Australian owned and operated financial services company. We have been operating for over sixteen years backed by twenty-five years stock and futures market experience. If you would like to read more about index futures trading, please visit https://www.titansecurities.net/how-to to find our news and education page. We offer a personalised service and are always available to have a friendly chat with new potential clients.


Matthew Corica is a full-time private trader and Adviser at licensed research and investment firm Titan Securities Pty Ltd | AFSL: 307040 | 1800 228 600.


This article has been written for educational purposes only. If the reader wishes to trade or invest in any financial market due to this article, then to satisfy any unforeseen disclosure obligations of the writer as an Australian Financial Services Licence holder, please refer to our standard risk disclaimer located at www.titansecurities.net/disclaimer


PLEASE NOTE: Currency converted margins and point values quoted in this article are variable. Margin rates can vary depending on the broker.

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