The futures market is massive, and allows you to trade futures contracts for underlying assets, including interest rates, energies, cotton, commodities, sugar, oil, and numerous other investment vehicles. Trading futures is also popular because you are not limited to one market; you can find opportunities for futures trading in almost all markets.
As with any other investment option, you need a well-defined trading strategy if you would like to become a successful options trader. These strategies will help you avoid emotional trading, minimize risk, protect your investment and maximize returns. In this article, we have prepared a list of the most popular futures trading strategies you should know about.
Understanding Futures: What Are They?
Futures are contracts that require a trader to buy or sell an asset at a set price at a predetermined future date. Futures are comparable to options but with one key difference.
Trading options gives the trader the right to buy or sell options but does not obligate them to do so. Futures, on the other hand, require that the trader sells or buys a futures contract regardless of prevailing market conditions. In other words, futures traders cannot opt out of executing their contracts like options traders can.
A futures contract’s price is determined by several factors, including the expiration date, prevailing market price, and the underlying asset’s value. Futures are also standardized so a trader always knows how much of a commodity they are speculating on. For example, the price of a futures contract using cruise oil as the underlying asset depends on the cost of 1000 United States barrels.
Futures Trading Strategies
Speculators use futures contracts to profit on the rise and fall of the underlying asset’s value. They use various strategies when doing so and we will look at those below.
The Pullback Strategy
To understand how traders use this strategy, we should understand resistance and support levels. The resistance level is the highest price that an asset’s price has difficulty surpassing. Support level is the lowest price that an asset has difficulty going below.
The pullback futures trading strategy is based on price trends where the price rises above the resistance level or falls below the support level before reverting to the level it broke. If the price rises above the resistance level and reverses, it resets its resistance level. When it does, traders buy a futures contract thinking the price will keep increasing.
When the price trends downwards and breaks the previous support level, it can traverse and return to this level. This is known as a pullback, and traders typically sell their options if they think the downward trend will continue.
Some traders also buy the underlying asset alongside buying or selling a futures contract during a downtrend because they know the price will rise unless something catastrophic happens.
Going Long
Traders also buy futures contracts if their analysis shows that the underlying asset’s price will increase in the near future. If this analysis turns out to be true, the trader can sell the futures contract at a higher price, pocketing the difference as their profit.
Many traders who use this strategy also use leverage when trading. Before doing this, it is important to talk to an investment and futures trader so they can explain the implications of doing so to your profits and losses. You can also read advice online from experts like James Cordier.
Spread Trading
The spread trading strategy entails buying on futures contracts and selling another at the same time or later. The goal is to profit from the price difference between the two futures contracts. Specifically, traders do this to profit from the unexpected relationship between the selling price of one futures contract and the buying price of another.
Spread trading has two significant advantages. First, trading the difference between two contracts like this is a hedge that allows traders to lower their risks and exposure. Second, it is unaffected by market conditions and can reduce the impact of market-wide price fluctuations.
Swing Trading
Swing traders hold positions for a few days or weeks and take advantage of short- to medium-term changes in an asset’s price movements. They use highly advanced technical analysis to set precise entry and exit points because even the smallest delay in entering or exiting a position can make a huge difference to their profits.
Swing trading requires a lot of discipline and patience, and traders who choose it must also have an advanced understanding of risk management to minimize losses.
Trend Following
As the name implies, this strategy entails following established market trends. Traders look at charts and use analysis to identify markets moving in a specific direction and enter those in the same direction as the prevailing trend.
The key to profiting from this is to follow trends closely and exit positions quickly once a reversal occurs or is imminent.
Futures trading can be highly profitable for traders with the right strategies and who understand how to manage risk. Although there are no guarantees in investing, traders have been using the strategies discussed above for a very long term to put themselves and their investments in the best positions possible.