Futures are a popular trading instrument whose price is determined by the underlying financial instrument. If you want to study futures contracts well and become a successful futures trader, you need a well-defined trading strategy that helps you control risk and avoid emotional trading.
In the following article, we’ve put together our favorite futures trading strategies, explaining each strategy, its entry and exit points, and the things to avoid when trading futures.
What are the futures?
Futures are popular financial contracts that force both parties to trade an asset at a predetermined price and on a predetermined date in the future. Unlike options, the buyer has the right but not the obligation to exercise his option, and futures traders must comply with the terms of the futures contract upon expiration, regardless of the current market price.
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The cost of a futures contract depends on the underlying fund, its current market cost, and the expiration date. Popular underlying assets for futures contracts involve physical commodities like oil, gold, copper, and natural gas, or financial instruments like currencies and stocks.
Futures are standardized contracts, which means that the amount of the underlying asset is always stated accurately. For example, a British pound futures contract equals exactly £ 62,500, a natural gas contract at 10,000 MMBtu (million British thermal units), a crude oil contract at 1,000 US barrels, and a gold contract at 100 ounces. Troy of pure gold.
Futures contracts are most often used for hedging and speculation. For example, a farmer may want to hedge against falling corn prices by purchasing a corn futures contract with a predetermined price and settlement date. Thus, the farmer knows in advance the price at which he can sell his product.
Speculators use futures contracts to speculate in the market and profit from a fall or rise in an underlying instrument’s price. Most futures bonds are not held until their expiration date, as they can be regularly traded through the exchange. The price of a futures contract contributes to the current market price of the underlying instrument.
# 1 reversal strategy
A pullback strategy is a powerful futures trading strategy based on price reversals. A pullback occurs in trending markets when the price breaks above or below a support/resistance level, reverse, and retests that broken level.
During an uptrend, the price breaks above the established resistance level reverse and retests the resistance level. After completing the retest, the trader opens a long position in the direction of the uptrend.
During a downtrend, the price breaks below the established support level reverse and retests the support level. This is a pullback, and the trader will enter a short position in the direction of the main downtrend.
# 2 Rank Swap
Range trading means that the trade bounces off important support and resistance levels on the chart. Some markets like to trend, for example, stocks, while others, like currencies, like to trade in a range.
Most of the market participants are still people with emotions and memories. When it is difficult for the market to exceed a certain price level, market participants will refer to that level as the resistance level. When the price reaches the same level again, some traders will start to make a profit, while others will go short on the market, which will increase the selling pressure on the financial instrument and will probably lower the price.
# 3 Business breakups
Breakout trading, one of the most famous approaches to day trading, is immensely popular with futures traders. As the name suggests, breakout trading aims to catch market volatility that occurs when price breaks out of chart patterns, channels, trend lines, horizontal support/resistance levels, and other technical levels.
Popular chart patterns for trade breakouts include head and shoulders (trade with a neckline breakout), rectangle, pennant, and triangle patterns that often indicate a continuation of the main trend, and double highs and lows.
# 4 fundamental business strategy
While most of the futures trading strategies described in this article are technical in nature, you should be aware that most high volatility price movements are a by-product of changes in the underlying principles of the underlying instrument. Fundamental indicators initiate and reverse trends and traverse significant levels of support and resistance.
Professional futures traders should be aware of fundamental changes in traded financial instruments. As practice shows, fundamental traders base 80% of their trading decisions on fundamental principles and 20% on technical ones.
One of the main disadvantages of fundamental analysis is that it does not provide accurate price levels for trading, and this is where technical analysis comes in. The basics are used to determine whether to go long or short, while the technical are used to set profit targets and stop-loss levels.
Futures Trading Strategies to Avoid
While no doubt having an effective trading strategy can significantly improve your trading performance, there are also specific points and strategies that you should avoid. Here’re the most important ones:
- Trading highly illiquid markets – The market’s liquidity depends on the number of buyers and sellers at every price level. A highly-liquid financial instrument, such as the GBP/USD pair or stocks of blue-chip companies like Tesla, has many market participants ready to jump into the market at almost any price-level around the current market price. This decreases the volatility of the security or currency pair, although the associated trading risks. Illiquid financial instruments can shift a lot even on small trading orders, which can quickly begin large losses.
- Scalping strategies – Scalping is a common and popular short-term trading style that tries to takes advantage of tiny price movements on very short-term timeframes. Scalping is a fast-paced and exciting trading method that attracts many traders, especially those just getting started trading. Unfortunately, those traders often end up with massive losses. To consistently profit with scalping, you’ll need discipline, experience, and nerves of steel. First, you need to learn how to trade profitably with longer-term trading styles, like swing trading and day trading.
- Holding trades overnight / over the weekend – Each time you decide you hold a trade overnight or over the weekend, you can be exposed to unfavorable market events leading to losses. This is especially true when holding trades over the weekend.
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