Derivatives market

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Basic principles of working with derivatives for beginners. 

derivatives market is a market for financial derivatives (derivatives). The derivative itself is an agreement (contract) that provides for the exercise of rights and / or the fulfillment of obligations associated with a change in the price of the underlying asset underlying this instrument. These changes lead to either positive or negative financial results for each of the parties.

In financial markets, a derivative is an instrument whose price changes depending on the change in the underlying asset, which can be anything, not only price, but also, for example, air temperature, rental rate or inflation rate.

Derivatives for beginners are always a lot of mistakes. After all, novice players working in the derivatives market make a large number of mistakes, the most critical of which lead to very substantial losses or even to zero their trading deposit.

derivatives market – how to avoid problems? In order to avoid critical mistakes, we will outline 5 principles that allow even a novice investor in the derivatives market to save money in the market.

5 tips for beginners

1. Reserves and margins should be kept under control. To work profitably with derivatives (options or futures), you should monitor the margin level at all times. It is worth noting that index futures should be traded in such a way that the ratio of reserves and margin for impairment of positions is approximately 1 to 5.

2. Should be taken into account in the work of gaps . It’s no secret that derivatives tend to open in a new trading session with a price gap from the previous day’s close. An exception is considered when futures are traded around the clock. Derivatives beginners incorrectly believe that all gaps are closed. But not all price gaps are closed at all, there are price ranges that the market constantly gaps in one direction or the other. What to do? There are 2 methods:

  • work with the expectation of holding a position for at least several days, while placing stoploss orders in such a way that an accidental gap could not affect them
  • close all trades at the end of the trading day

3. Working in the derivatives market , do not get carried away with short options. Sell ​​them in the volume for which your trading account is ready. It is important to remember that selling options short or in large quantities is very dangerous in the derivatives market.

4. Diversification is a mirage . Concentrate on two or three instruments. Do not expect that dispersing your poses in different instruments will ensure stability on your account, because diversification may not appear on it. The main reason is that you make a forecast with your own hands, choose the tools, determine the moment to work.

 5. Work on low-value options little by little. If you use the so-called “off-cash” options (the price of which is far from the current market), then their purchase is easiest to consider as a venture investment. Such option contracts will easily bring you substantial profits, as the cost of such derivatives is low.

Therefore, beginners can be advised to buy options in such a quantity that these investments, in case of loss, do not bring too much experience and stress.

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