Futures Trading Strategies

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, they 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. While futures trading requires a specialised trading platform, Tradu offers robust tools for other asset classes.

Basic futures trading strategies

At a basic level, futures are simple: agreements to trade a specific asset, at a specific price, on a specified date. As a financial instrument, futures enable traders to speculate on asset prices without owning the underlying asset. Futures lock in the price at a future date, allowing traders to plan their positions strategically.
Futures trading aims to capitalise on price movement, allowing profits whether the market rises or falls.
If you're unsure about the fundamentals of futures trading, be sure to check out our futures guide. Mastering the basics of futures is essential before applying these strategies to real-world trading.
These basic strategies allow traders to profit by leveraging simple market movements with minimal complexity. These strategies are ideal for beginners due to their simplicity and lower complexity, helping traders build confidence while navigating volatile futures markets.

Going long

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. Going long increases market exposure, allowing traders to benefit from rising asset prices.

Going short

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. Shorting futures can also act as a hedge against long positions in related assets, reducing overall portfolio risk.

Spread trading

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:

• When you use the same underlying asset but different expiration dates
• When you enter a position on two closely related products (such as crude oil and gas) but use the same expiration date.

Advanced futures trading strategies

Pullbacks

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. Market conditions, such as economic data releases or geopolitical events, often trigger these pullbacks.

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. To manage risk, traders should use stop-loss orders when entering pullback trades to limit potential losses.

For this reason, they can be a risky strategy – so they're usually reserved for experienced traders.

Trading the range

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. Careful entry and exit points within the range maximise profits while minimising exposure to breakouts.

Breakout trading

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. Breakout trading offers trading opportunities when prices breach key support or resistance levels. This allows traders to take advantage of significant price shifts driven by market volatility.

Normally, traders will go long if prices hover above the resistance level and go short if prices dip below the support line.

Trend-following

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. By analysing market trends, traders can identify sustained price directions to guide their long or short positions. This strategy allows traders to capitalise on market momentum for consistent profits. By aligning with the overall market direction, trend-following maximises profit potential in sustained trends.

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.

Counter-trend trading

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. By anticipating market moves against the trend, traders can profit from short-term reversals. Counter-trend trading relies on prices that revert to the mean, creating opportunities for profitable reversals.

Buyer and seller interest

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 understanding of the market helps traders gauge liquidity and predict price impacts from order activity. 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.

What are the best future markets to trade?

As futures are so versatile, it makes them ideal for many different markets. Some of the most popular ones include:

• Commodities – A crude oil futures contract, for example, allows traders to speculate on price changes in this highly volatile commodity. Similarly, a corn futures contract is popular for trading agricultural commodities, offering opportunities in stable yet fluctuating markets. As a type of financial contract, commodity futures enable speculation on assets like crude oil, corn, and gold.
• Indices – Futures trading strategies can also be used on shares from an exchange such as the S&P 500 or Nasdaq 100.
• Currencies – Futures can also be used to trade currency pairs like GBY/JPY and EUR/USD.

What's the best futures trading strategy?

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. Choose a strategy that aligns with your trading goals, whether you prioritise steady gains or high-risk opportunities. The optimal strategy is based on market dynamics and your ability to adapt to changing conditions. Finding the right strategy requires balancing risk, market conditions, and your trading objectives. Evaluating the pros and cons of each strategy helps traders make informed decisions tailored to their goals.

Choosing the best futures trading strategy involves evaluating market conditions, risk tolerance, and personal goals before acting.

Please note you cannot trade futures with Tradu; this article is for informational purposes only.