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4 mistakes to avoid while investing in derivatives

To err is human. To learn from these mistakes and invest better later is a sign of a good investor. Investing in futures and options is a great way to hedge your bets and make money in the stock market. However, not all investors do it correctly right from the beginning. That’s why, here is a list of mistakes you can avoid when you invest in derivative investments.

1) Not having a proper exit strategy
When the clock strikes 5:30, you know it is time to leave the office and head home (or wherever your evening plans take you). This is a proper exit strategy. Unfortunately, many investors don’t know when to get out of derivative investments.

a) You need to know when to exit when you are not doing well
b) You need to know when to exit when you are doing well

For example, you may have made a long call option hoping that the price of the stock would increase significantly over the strike price before the option expires. But if that’s not happening within the period, exit the option and seek better trades or long term derivatives. At the same time, know when to exit on short term derivatives when you are making a profit. Don’t wait on a profitable trade because you are hoping for the price to increase before the option expires. Stay too long and the tide can reverse at the blink of an eye.

2) Having unrealistic expectations
Yes, there are a lot of traders in the market who do nothing but invest in futures and options all day. But that doesn’t mean you should quit your day job too. The derivatives segment does offer incredible opportunities for success in the financial market. But in order to avoid mistakes investing in derivatives and reach that stage, you need to gain lots of knowledge and experience. Don’t have unrealistic expectations just when you start investing. This can often lead to frustration and irrational decisions in the market. Have patience and focus on your investment goals one trade at a time.

3) Doubling up to compensate for losses
Many traders double up when the price of an asset has moved in the opposite direction. Doubling up is a strategy where the investor doubles his position in the option. This is to earn a larger return when the stock price moves to a more favourable position. Guess what, this strategy is highly risky and rarely works. At such times, it is best to close your trade and minimize your losses.

4) Lack of self-discipline
In a stock market, the price of a security either moves up or down. But when it comes to derivatives, you can have multiple futures and options contracts on a single security. And that’s why the derivatives segment can be quite risky. One of the tips to investing in derivatives is to have self-discipline to ensure good decision making and long-term success in the derivatives segment. Don’t act on unsolicited tips or rumours in the market. Always make an investment decision after you have conducted your own research.

The only people who don’t make mistakes in investing are time travellers. But since the technology has not been invented yet, you can be assured that everyone fumbles. But the important thing is to minimize your losses at such times. Have a proper strategy and trade accordingly. By avoiding the above mistakes, it is possible to perform better in the derivatives segment.
The stock market can be an exceptional investment approach that can offer bounteous yields and help you accomplish your financial goals, through smart investments. However, if you are hesitant in diving into the stock market, as a beginner, you may want to conduct due research and avoid the mistakes mentioned above. Alternately, you could also seek the help and assistance of a certified financial professional, to best understand the approach you need to take while investing in the stock market.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.