Actually, there are quite a few precautions you must take but here are four things you must certainly avoid if you want to trade in futures.

· Leverage in futures works both ways so you need to be cautious. This is where most futures traders get it wrong! If you have Rs.15 lakhs available, you can buy 1000 shares of Reliance in the cash market. Alternatively you can buy 6 lots (based on margin payable on futures). You can feel satisfied that your profits will multiply if the trade works in your favour. The problem is that your losses could also multiply.

· A common mistake is trading futures without stop losses. Just as profits can multiply in futures, losses can also multiply. When stop loss is triggered or profit target is hit, immediately exit the futures position. Averaging and waiting longer are not good options when it comes to futures.

· If company is quoting in the cash market at Rs.500 and there is a dividend payable of Rs.10, then the futures price for the month will be adjusted downward by that amount. That does not mean that the futures are cheap or that it is underpriced. That is the wrong approach to futures trading.

· When you see selling in futures don’t interpret it as selling. Chunk of the trade in the stock futures market is cash-futures arbitrage. Arbitrage means; large institutions and proprietary trading desks buy the same stock in the cash market and sell in the futures market to capture the spread and lock in the profit. Don’t interpret short accumulation in futures as selling in futures.

· Finally, don’t make the mistake of ignoring market liquidity of futures. Many mid cap stocks and especially small caps that are closely held are vulnerable to vanishing liquidity. This trend is more evident in times of market sell-off when the futures can trade at huge tick spreads. Vanishing volumes create a huge spread risk for you.