Futures contracts are agreements to buy or sell an asset at a predetermined price on a pre-agreed date in the future. As a versatile trading method that allows traders to speculate on the movement of underlying assets, futures are popular for trading commodities such as crude oil, gold, coffee, corn, soybeans and other raw materials. However, as futures can be highly leveraged, it can be risky.
That's why it's important to get your strategy right. To help you, we've put together our expert trading futures strategy guide below. Please note you cannot trade futures with Tradu; this article is for informational purposes only.
At a basic level, futures are simple: agreements to trade a specific asset, at a specific price, on a specified date.
The goal of futures is to predict the way in which the market will shift so that you'll be in the most profitable position possible. This is regardless of whether the asset increases or decreases in price.
If you're unsure about the fundamentals of futures trading, be sure to check out our futures guide. If you've grasped the fundamentals and are ready to make a trading plan, here are the three most basic futures trading strategies that you'll need in your arsenal.
Going long involves buying futures with the expectation that the asset will rise in value. If the underlying asset does increase in price, traders will profit. This is because traders can sell the futures contract for a higher price than that for which it was bought.
When you go long, you are effectively 'buying' the asset.
You would 'short' a position on a future (a.k.a. sell a futures contract) if you believe that the asset will fall in price. If the asset moves in the market direction that you predict, you'll make a profit.
As well as going long or short, there's also spread trading. This is where you simultaneously buy different futures contracts. When the price difference gets bigger or smaller, you can make a profit.
Spread trading futures strategies are used in two scenarios:
One of the most powerful futures trading strategies is the pullback.
When a market is trending, there will often be momentary relapses or reversals in the direction of said trend. This relapse is called a pullback. They're common in futures trading and can be caused by several external factors – news events, for example.
If there is a strong trend on an asset, it limits the opportunities for traders to get involved in the trade. Pullbacks therefore open opportunities for more traders to piggyback on an existing trade, even if they missed the initial entry point.
Although pullbacks can be excellent for traders to enter a more beneficial position, they can lead to trend reversals. For this reason, they can be a risky strategy – so they're usually reserved for experienced traders.
Trading the range is where an asset will bounce between established highs and lows for a certain period. These highs and lows are usually defined by the support and resistance lines.
You can use futures to trade the range as you enter an agreement where you buy and short over a long period of time. For example, if you see a commodity trading at $50 and think that it will rise to $55, you will trade in a range of $50-$55. Using this example, if you're trading within the range of $50 and $55, you will buy stock when it's $50 and sell when it reaches $55.
You can then repeat this method until you believe that the stock will fall outside of the pre-identified range.
A popular strategy used by day traders is breakout trading. With the clue in the title, breakout trading is where traders harness market volatility by entering positions when the price of an asset is breaking out of chart patterns.
A breakout often mirrors a shift in the market's sentiment. As such, breakout movements often come hand-in-hand with an increase in trading volume.
Traders use futures to take advantage of this volatility by entering a position and predicting the direction of the breakout. Normally, traders will go long if prices hover above the resistance level and go short if prices dip below the support line
Although you might see yourself as a trendsetter, some of the best futures trading strategies follow trends.
Trend-following strategies allow traders to enter a position in the direction of an emerging trend. For example, if you identify an upwards trend, you'd go long. On the flip side, if an asset is trending downwards, you'd go short.
For disrupters, counter-trend trading is a good futures trading strategy. Counter-trend trading involves taking a position in the opposite direction of a trend. For example, if a trader spots an uptrend, they look for shorting opportunities and vice versa.
As a type of swing trading, counter-trend trading is built on the principle that even prevailing trends will occasionally see reversals. These price 'swings' are exactly what traders look to exploit.
As the name suggests, this method investigates the behaviour of buyers and sellers – and their interests – to decide whether to buy or sell a futures contract.
By analysing buyer and seller data, traders can figure out the Depth of Market (DoM) window. This will show the trader the number of open buy and sell orders as well as the liquidity of the asset.
If assets are highly liquid, huge order numbers won't impact the price too much. For example, a huge company like Apple won't be the best choice for buyer and seller interest strategies. If liquidity is low, though, a small bump in trading orders can have a big impact on the price of the underlying asset.
As futures are so versatile, it makes them ideal for many different markets. Some of the most popular ones include:
Although all futures trading strategies start with the same underlying principles (entering a contract to buy/sell an asset at a set price, on a set date), that doesn't mean that there's one strategy that's suitable for all trades.
The best futures trading strategy will depend on the market, your trading personality and your risk appetite. Once you've weighed up all the pros and cons of each advanced futures trading strategy and decided on your route, it's time to act.
Please note you cannot trade futures with Tradu; this article is for informational purposes only.
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