Securities and Exchange Board of India (Sebi) today introduced mini-contracts in the derivatives markets based on the Sensex and the Nifty indices to improve liquidity and increase investor participation for the index-based products.
Mini-contracts are a fraction of normal derivatives contracts, and will help individual investors hedge risks of a smaller portfolio.
Initially, the mini-contracts would be limited to index futures and options on the 30-share BSE index and the 50-share NSE index.
The Bombay Stock Exchange (BSE), in a separate release, said it would launch the mini-contracts on the Sensex from January 1. The mini Sensex contracts will have a market lot of five units.
The small size of the contract would be attractive for retail investors as there would be comparatively lower capital outlay, lower trading costs, more precise hedging and flexible trading, the BSE release said.
The security symbol for the Sensex mini-contracts would be MSX and it would be available for one, two and three months along with weekly options, BSE said.
NSE officials were not available for comments, but it is expected that the exchange would also announce the launch soon.
The recommendation to introduce mini-contracts was made by Professor M. Rammohan Rao, who headed the Derivatives Market Review Committee (DMRC) of Sebi.
The move to introduce mini-contracts follows its increasing popularity globally due to the higher liquidity and the ability to get in and out of a trade quickly with low impact cost.
Understanding Short Term Trading
Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.
Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.
Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.
Types of Moving Averages
1) Simple Moving Average (SMA)
SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.
2) Exponential Moving Average (EMA)
EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.
The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.
Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.
Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.
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