Futures Trading Strategies You Can Try
Nowadays, there are many ways you can make money. However, the tried and tested methods would be through trading, and there are many mediums with which you can do so. You have stock, forex, options, etc. In this article, we will be talking about futures trading. What is it and what future trading strategies are best for you?
- Futures Day Trading Strategies Basics
- The Pullback Strategy
- Trading the Range
- Breakout Trading
- Bad Futures Trading Strategies
- Learn Futures Trading with AsiaForexMentor
Trading Strategies Basics
Futures are similar to options, with a catch. While an option gives the buyer the right to buy or sell an asset at a certain price and time, it does not enforce an obligation to do so. On the other hand, futures tie such obligations to the buyer and seller. That means, if you trade futures, you are obligated to buy or sell the asset at a specific price and time unless the holder’s position is closed before expiration.
Similar to options, the price of a futures contract relies on the underlying asset, its current market price, and the expiration date. The assets in question could be anything from physical commodities such as precious metals, natural gas, or financial instruments such as stocks or currencies.
Futures are standardized contracts. In simpler terms, that means that the quantity of the asset is always precisely stated. Again, similar to options, futures are utilized as a speculative vehicle. This begs the question: why should you pick one over the other?
For options, you have the choice to buy or sell the asset. You only purchase the right to make that decision. At the same time, prices in this market move less, therefore less liquidity. Options contracts also lose value quickly for the buyer because there is always the chance that your options contract would expire worthless.
On the flip side, futures come with an obligation to buy or sell the underlying asset. However, prices move more in this market, which translates into more liquidity. Plus, futures maintain more value over time. This is because futures contracts are as close to trading the actual commodity you can get without actually trading it. That means, they are the purest derivative for trading commodities.
Future contracts are more liquid than options contracts, meaning that futures contracts are a more viable option than options contracts. Because future contracts move more quickly, you can get in and out easily as well. This is because options only move in correlation to futures contracts. Moreover, you do not have to worry about the time decay that plagues options. This means that options lose value the closer it gets to its expiry date.
Also read: Parabolic sar tested and explained
With that said, let’s go over some of the most popular futures trading strategies.
The Pullback Strategy
If you want to know futures trading strategies, Reddit recommends the pullback strategy for beginners. This is a popular strategy that involves capitalizing on price pullbacks, hence the name. This occurs during a trend in the market where the price keeps reaching new highs or lows.
During an uptrend, the price goes above a resistance level, which is the area where prices usually never go above in that particular period. After that, the price usually retests the resistance level, which is now the support level, and then bounces back into an uptrend. This is where traders enter a long position.
If you catch the market in a downtrend, do the opposite. Look for a well-established support level and wait until the price goes below that. That level now becomes the new resistance level, and the price would retest that again. This is where traders enter a short position in expectation of a continuing downtrend.
Pullbacks are created when traders start to take profits, therefore pushing the price in the other direction from the first breakout through the support or resistance level. Some traders that missed out on the move would wait for the price to return to that level so they can enter at a more favorable price, therefore pushing the price up.
This strategy makes use of a critical phenomenon in technical analysis. When a well-established support or resistance level breaks, it becomes the opposite. That means, the old resistance becomes the new support level and vice versa. This is notable on higher timeframes such as daily, although you can see it on even a 30-minute or 1-hour charts.
If you decide to go ahead with this, you should know where to exit the market. Your stop-loss should be just below or above the retested support or resistance level during an uptrend or downtrend, respectively. Your profit target should be the recent highs.
Also read: Gartley Pattern
Trading the Range
This strategy also makes use of the support and resistance level. It relies on the price bouncing off the support and resistance level. Certain markets are usually in an uptrend or a downtrend such as stocks, while others trade in a range, such as currencies. This strategy relies on human psychology. They have emotions and memories.
When the price fails to go above a certain level, that becomes a resistance level. At a larger timescale, you can spot the major resistance level. This is where traders usually set their take-profits since they know that the prices would not get any better than this. Some other traders, operating under the same assumptions, would open short positions because they know the price is likely to go down. Both of these activities will increase the selling pressure on the financial instrument and therefore push the price back down.
On the flip side, when the price does not go below a certain level, that is usually the support level. Here, traders who have short positions open would set their take-profit above the support level because they know that the prices will not go any lower than this, and they do not expect to make any more profit from this. At the same time, traders who want to open long positions also understand that the prices would never get any better than this, and so they buy the dip. Both of these activities will increase buying pressure and send the price back up.
When you trade the rage, you want to know if the market is trading in a range. This means that you want the market to go sideways, without any pronounced highs or lows in price. If the market does not produce higher highs or lower lows, that means that the environment is a ranging market.
With this strategy, your stop-loss should be near the support/resistance level depending on if you want to go long or short. Just make sure to give some room just in case for fake breakouts or unexpected volatility. Your profit target should be around the recent highs or lows.
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Speaking of breakouts, this strategy is also popular among traders. As the name implies, this strategy capitalizes on the market volatility that there is a breakout. A breakout usually occurs after an extended period of uncertainty, when the market goes sideways for a while.
There are many popular chart patterns for this strategy such as rectangle, pennant, head and shoulders, etc. These patterns suggest a continuation of the underlying trend. Soon after a breakout, the market usually undergoes increased volatility since pending orders would be executed. Traders using the breakout trading strategy capitalize on this newfound volatility by taking positions in the same direction as the breakout.
Traders use pending orders such as buy stops and sell stops to capitalize on breakouts. These orders become market orders when the price reaches a specified level. Therefore, traders can set it up early on without having to wait for the actual breakout to occur to catch the volatility.
With this strategy, the stop-loss levels would be above or below the level where there is a price breakout if you are going short or long respectively. The market tends to attempt to correct itself in the form of pullbacks, which gives traders time to add their open positions and other traders to join in on the fun.
For your take-profit, that would vary on the type of breakout. Usually, you look for the recent highs and lows or at the short-term support and resistance levels.
Bad Futures Trading Strategies
During your research, you may come across many types of trading strategies. However, not all of them are created equal and some of them are either too complex or just bad. Here are a few tips on how not to trade futures.
First and most importantly, you want to trade in markets with high liquidity. Liquidity is determined by the number of buyers and sellers at each price level. High liquidity markets such as Apple stocks and EUR/USD forex markets mean that you can get in and out of there easily. Trading in a low liquidity market is a risky play since there is a huge risk for large losses. In fact, various Binance futures trading strategies also recommend trading in markets with high liquidity.
Scalping strategies are also not recommended. Although it is a popular short-term trading strategy, it relies on minute price movement. Some day traders like this strategy because it is fast-paced and exciting, but it can also lead to a lot of losses very quickly if you don’t know what you are doing. If you want to make a consistent profit with this strategy, you need to be very experienced, disciplined, and cool-headed. This strategy is not for everyone, more so beginners. Novice traders are better off sticking to long-term trading styles.
Learn Futures Trading with AsiaForexMentor
Of course, there are only some of the basic futures trading strategies. There are many more out there that requires the use of technical indicators and other sophisticated features that demand a deep understanding of the market. Novice traders may find such strategies overwhelming. For this reason, beginners are recommended to stick to the simple but tried and true strategies above. You can find a futures trading strategies PDF to learn more about futures intraday trading strategies.
If you are a beginner and just want a strategy to try out, the best one would be the pullback strategy. Its simplicity is one of its key strengths. You do not have to look far into S&P 500 futures trading strategies. But before you do, make sure to create a demo account. Many brokers offer such an account for free. What you get is a trading account with virtual currency and you can work with live market data to see how you would fare in the real market.
Demo accounts are a powerful tool for both novice and veteran traders. The latter usually use it to try out new strategies. They provide a safe environment to practice trading. Since it is completely free, it is a waste not to make use of such a versatile tool to try out futures trading strategies – crypto, stocks, forex, etc.
One downside to these basic strategies is that, though simple to implement, their profit potential is rather limited. Plus, it might suit your particular trading style. For this reason, it is best to look around and try out different strategies and see what suits you. You also want to learn more about the market by reading online articles such as this one.
But reading can only get you so far. If you are short on time and want to start making money, there is a way to expedite the learning process. You can invest in yourself by enrolling in a trading course. That way, you can learn futures trading strategies, India, US, UK, or from anywhere in the world. For that, we have just the course you need to be a successful trader.
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With our One Core program, we will teach you everything you need to know about trading such as futures trading strategies and more. With our versatile ROI-based trading system, you will be able to trade in virtually every market with a chart, be it forex, cryptocurrency, stocks, futures, options, etc. That way, even if futures trading does not work out for you, you can still try your luck in other markets.