Warren Buffet once described derivatives trading as “Weapons of mass destruction”. While money has been lost in futures trading, it is more due to lack of discipline and poor surveillance rather than due to a fault in futures trading, per se. In famous derivatives disasters like Barings and UBS, the mid-office and the back office had absolutely no clue about the risk that the trader was exposing their capital to. Now that is a sure shot recipe for a trading disaster.

The principal downside in futures trading is that it is leveraged and hence downside risk gets magnified. Futures trading works best when you take a long term view in a trending market and use rolls to mirror a cash equity situation. Short term trading in futures can work if operated within the parameters of strict stop losses and profit targets. Because, where else can you buy a chunk of the entire market with an investment as low as Rs.1,50,000/- That is surely food for thought.