f&o trading: Learning with ETMarkets: A Beginner’s Guide to F&O Trading

The mystery surrounding F&O inspires traders to pursue this “one” trade of extravagant returns and the feeling of “having arrived”.

Now, to ‘arrive’, shouldn’t they ‘start’ their journey somewhere, ideally armed with facts, tact and rules? No matter how many years you’ve been in stock trading, you need to start F&O trading with a professional mindset – with a focus on minimizing risk and maximizing rewards, acquiring the required knowledge and developing skills with a lot of self-discipline, patience and conviction.

It’s a serious job and you have to do it seriously.

How much capital to start with is always a question in a beginner’s mind.

Initially, only allocate 10% of your investable capital to start trading in F&O. Why? Because F&O is a game of leverage. You may end up with the temptation of higher yields and higher exposure, which may not suit your risk appetite.

Understand the margin requirements for different derivative instruments, viz. currencies, commodities, equity derivatives, etc. Sources of margin are cash deposited in the margin account, pledged stocks, or a debt fund.

Don’t ignore transaction fees such as taxes and brokerage fees, they eat away at your profits, especially if you have a habit of over-trading. Professionals study more and exchange less.

Enthusiastic beginners in F&O might fall into higher leverage due to unreasonable expectations or satisfying their greed.

In a scenario like on capital of 1L, in commodity derivatives, you decide to use higher leverage up to 10L. It’s a double-edged sword. A 10% move in the desired direction can earn you 1L, i.e. 100% return on your capital; however, a 10% opposite move can result in a loss of 1L and wipe out all capital.

F&O is like fire, powerful for cooking over low heat, creating wealth for you or burning down the house if risk management is kicked out.

Leverage is good but provided it is backed by proper study, risk management rules and stop loss tracking discipline.

Pro-tip reminder: Set the absolute percentage of capital you could afford to lose in a single trade and stick to it.

If you are a beginner, start with low beta instruments such as USD-INR. And if you have limited capital, you can even venture into a trading instrument such as Silvermicro.

These instruments will help you understand the game of lower-risk derivatives. You should explore your trading style and psychology before venturing into highly volatile instruments such as cryptocurrency or Bank Nifty.

In F&O trading, the profit or loss is settled every day (Mark-To-Market or MTM). The daily fluctuations of losses and profits reflected in your trading account can sometimes turn your excitement into anxiety, fear or panic.

Here, mind management becomes imperative. In fact, F&O trading helps you discover your characteristics as to how you perceive and react to unforeseen situations.

Often people fall into the vicious cycle of recovery mode and dig their own grave. You must understand that loss is an integral part of this profession.

So accept each result with a smile like a pro and move on to the next opportunity with focus, discipline and patience.


Attracted by “easy to use” trading applications? Out of tips for making money fast? Impulse fits to quit a job and follow F&O full time? If you’ve ever considered any of these, stop there! Remember that if you cannot be successful in your job, you cannot be successful even after quitting your job.

F&O trading is not a full-time activity, nor is gambling. However, traders behave like gamblers rather than professionals. So, be on top of the process and continuously improve your wisdom-based skills to achieve professionalism.

Beware that 90% of beginners lose 90% of their capital in less than 90 days! Novices often confuse desperation with passion.

But passion or desperation, without ability, is a sure path to failure. In the F&O market, money flows from the pockets of the losers to the pockets of the winners, from the undisciplined to the disciplined, 95% of beginners to 5% of professionals! Strive to belong to that 5% of pros to earn 95% money.

Also keep in mind that this is an options seller’s game that takes advantage of the time to expiration decay. Having the ability to analyze options data is paramount to success.

Beginners often indulge in buying options, but they should realize that most options expire worthless at the time of expiration.

Therefore, you need to develop the skills to identify market trends and only then venture into buying options, which is quite a lucrative proposition.

Identifying market trends as strongly bullish, strongly bearish, slightly bullish, slightly bearish or neutral will help position you to deploy a relevant F&O strategy.

Even if you got that “fantastic” trade, without proper training and practice, it could qualify as a bad win or a “fluke”. And the strokes of luck don’t last long.

All success starts with a good plan. In F&O and in life, to fail to plan is to plan for failure.

Why be happy to be a “commercial marvel”? Why not a professional who knows his tricks well? After all, you didn’t come this far, only to come this far!

(The author is Financial Trader, Founder, Avadhut Sathe Trading Academy. Recommendations, suggestions, views and opinions are his own. These do not represent the views of Economic Times)


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