Tips-to-trade-in-Bank-nifty
Are you a regular trader in the stock markets? Stock markets have seen increasing interest from the trading community and the trading volume on the stock exchanges is a testament to the same. However, trading in stocks is not as easy and therefore, many traders prefer trading in indices. Bank Nifty is one of the popular indices in the country that is largely considered to be among the most actively traded indices. So do you want to trade this index too? Check out this blog to know the core details of Bank Nifty and how you can trade in Bank Nifty successfully.
The Bank Nifty (NSE) is a stock index formed in 2003 consisting of 12 carefully chosen stocks from the banking sector. These stocks are listed and actively traded on the National Stock Exchange (NSE) in India and Bank Nifty uses January 2000 as its base year for calculations.
The list of stocks on Bank Nifty as of 24th August 2023 includes,
These stocks are selected based on their liquidity and market capitalization, encompassing both public and private sector banks. By employing a weighted methodology, this index functions as a robust yardstick, offering a comprehensive overview of the performance of the banking industry within the capital market. This index is also a reference point for facilitating the creation of index funds, & ETFs and other structured financial performance.
You can trade in Bank Nifty on the derivative market through futures and options. Let us understand these terms of the derivative market in detail
Bank Nifty Futures contracts confer upon the purchaser both the right and the obligation to buy or sell the Bank Nifty index at a predetermined price on a specified date in the future. Buying a Bank Nifty futures contract puts you in a long position, while selling it puts you in a short position.
The valuation of a Bank Nifty futures contract is influenced by market demand, supply dynamics of the contract, and anticipations regarding the forthcoming value of the Bank Nifty index. The potential gain or loss stemming from a Bank Nifty futures contract is calculated by multiplying the difference between the entry and exit prices by the contract’s lot size.
Bank Nifty Options contracts grant the purchaser the right, although not the obligation, to either buy or sell the Bank Nifty index at a predetermined price referred to as the “strike price.” This decision can be exercised on or before a specified future date, known as the “expiry date.” A Bank Nifty call option empowers the buyer to buy the Bank Nifty index at the strike price, while a Bank Nifty put option empowers the buyer to sell the Bank Nifty index at the strike price.
On the flip side, the seller of a Bank Nifty option termed the “writer,” is bound to either buy or sell the Bank Nifty index at the strike price should the buyer choose to exercise their right. The valuation of a Bank Nifty option contract is quantified as the “premium.” This premium is determined by several factors, encompassing the current value of the Bank Nifty index, the chosen strike price, the duration until expiration, the volatility of the index, and the prevailing interest rate.
The potential gain or loss linked to a Bank Nifty option contract is ascertained by subtracting the premium paid or received from the ultimate payoff delivered or received at the point of expiration or prior to it.
The expiration date for BANKNIFTY futures contracts is scheduled for the final Thursday of the respective expiry month. In the event that the last Thursday falls on a trading holiday, the contracts mature on the preceding trading day.
Bank Nifty Futures and Bank Nifty Options are traded in lot sizes of 15 with effect from 1st July 2023. This change from the earlier lot size of 25 was done with the view to increasing the participation of traders in the derivative market.
Index options like NIFTY, FINNIFTY, and BANK NIFTY are settled on a cash basis only.
To begin trading in Bank Nifty, beginners should understand the basics of futures and options, and the factors influencing their prices (like index value, strike price, time, volatility, and interest rates). They should also have a trading account with an NSE-registered broker offering derivatives trading. Beginners can use various forms of trading to trade in Bank Nifty. A few examples of the same are highlighted below.
Traders can capitalize on short-term price fluctuations within the same trading day. For this, they can analyze 5-minute candle charts and use bracket orders for automated entry and exit points. For instance, traders can place buy orders at bullish candle highs and sell orders at bearish candle lows can help profit from quick moves.
Traders can use swing trading to capture medium-term trends by holding positions for several days to weeks. For this, traders should study daily or weekly candle charts, identifying support and resistance levels, trend lines, and moving averages. Options strategies like straddles or strangles can also be used for directional bets in swing trading.
Hedging is used to protect against adverse price movements by using one position to offset potential losses in another. Hedge using futures or options contracts to mitigate risk and exposure to Bank Nifty or its constituent stocks. For example, if you own stocks that make up Bank Nifty and anticipate a downturn, hedge by selling a futures contract or buying a put option on Bank Nifty.
Nifty is a stock market index representing the broader market performance of 50 major Indian companies across various sectors, while Bank Nifty is a specific index comprising 12 liquid and large-cap banking stocks (public and private sector banks), reflecting the performance of the banking sector within the Indian stock market.
Some of the popular trading strategies for trading in Bank Nifty that can be used by beginners are explained below.
Long Call Strategy involves buying a Bank Nifty call option. If the trader anticipates a bullish market, buying a call option allows them to profit from the Bank Nifty’s potential rise without the substantial risk of buying the actual index. Long Put Strategy entails buying a Bank Nifty put option. If the trader expects a bearish market, buying a put option enables them to benefit from potential downward movements in the Bank Nifty.
This strategy entails simultaneously buying a call option and a put option with the same strike price and expiry date and profit from significant market moves in either direction. It’s important when the trader expects high volatility but is uncertain about the direction of movement.
This strategy involves combining a bull put spread and a bear call spread. It’s used when the trader expects the Bank Nifty to stay within a certain range. It profits from limited price movement and decreasing volatility.
This strategy combines holding the Bank Nifty with selling a call option against it. It aims to generate income from the premium received while also offering some protection against potential downward moves in the Bank Nifty.
Traders can also utilise technical tools such as moving averages, trendlines, and the Average Directional Index (ADX) to recognise the current trend. In an upward trend, traders can buy Bank Nifty futures contracts, while in a downward trend, traders should sell or short futures contracts. It is important to note that traders should implement stop-loss orders to cap potential losses if the market moves unfavourably against their position.
For this strategy, traders need to observe price movements to pinpoint robust support and resistance levels. When Bank Nifty futures breach a resistance level or dip below a support level on notable trading volume, this signifies a possible breakout. Traders can seize the opportunity by entering a trade in line with the breakout direction, and prudently set stop-loss orders to effectively manage risk.
Employing a strategy similar to the equity market approach, traders can employ a Moving Average Crossover Strategy by leveraging two distinct moving averages, such as the 50-day and 200-day ones, to identify trends in Bank Nifty derivatives. When the shorter moving average surpasses the longer moving average, signifying an upward trend, the trader may opt to purchase Bank Nifty futures. Conversely, in the event of the opposite crossover, indicating a potential downtrend, traders might consider selling their Bank Nifty futures.
Bank Nifty since its launch has become quite popular among traders and attracts both beginners and seasoned traders. However, for effective trading, it is important to understand the index and its behavior as well as the nuances of the derivative market. Moreover, the risk of derivative trading in Bank Nifty also has to be accounted for in creating a successful trading portfolio.
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