Futures are popular assets among day traders and big institutional investors. A futures contract refers to an agreement between two people. In this agreement, the buyer will promise to buy an asset at a later date and at a certain price. Similarly, the seller will be needed to provide the asset at the agreed price.
This is enough to understand the huge difference between this asset and normal stocks, which are influenced in real time by news and other various things. This difference is also found in the strategies to be adopted, since they are obviously adjusted in a different way.
In this article, we will look at some of the top strategies to trade futures. But, first of all, some basic notions that it is good to have clear in mind.
Futures market definition
The futures market is a relatively traditional market that began in the agricultural sector. The idea is simple. If you are a corn farmer, you can enter into an agreement with a buyer.
The buyer can promise to buy your corn at $1,000 when you harvest it. This transaction will give you peace of mind since you will have a guaranteed buyer for your produce. Still, while the buyer has a right to buy, they don’t have an obligation to buy the corn.
Today, the futures market runs the world of commodities. In most cases, commodity traders make deals using the futures market. Some of the other types of futures market are in:
- Interest rates
and many more.
In the past, futures contracts were filled in the physical market. This has changed recently and the process is highly automated.
A good example of a futures market is in indices. If you are a keen listener of financial media, you have likely heard the commentators refer to index futures before the regular session. This happens since the futures market is usually open for longer hours than the regular session.
Another good example of a futures contract is the one offered by the CME Group. This is the same futures contract that is tracked by the BITO ETF.
Some of the biggest futures exchanges in the United States are the Chicago Board of Trade and CME.
Futures trading strategies
There are many futures trading strategies that you can use in the market. Some of these strategies are:
- Trend following
- Channel trading strategy
Let us look at each of these strategies briefly.
In trend-following, you focus on buying or selling assets that have already established a pattern. In this case, if a stock futures is rising, you buy it and benefit as the price rises.
Similarly, if the price is falling, you short it and benefit as it declines. You can use a trend indicator like moving average to identify where the trend is about to end.
For example, the chart below shows Dow Jones futures with a 25-day moving average. In this case, the bullish trend will continue as long as it is above this MA.
Second, you can use the reversals strategy. This is where the asset is moving in a bullish or bearish trend and then you enter a trade hoping that it will reverse. There are several approaches to this. You can use indicators, candlestick patterns like Doji and engulfing, and chart patterns like wedges and head and shoulders.
Third, you can trade futures using the channel strategy. This is where you identify a horizontal or diagonal channel and wait for a breakout.
One of the best approaches to this is to use pending orders. This is where you place a combination of a buy and sell stop and then protect them using a stop loss and a take-profit.
Tip: Holding Positions Until the Next Day is Risky
Also called going long on futures, holding positions overnight can possibly cause you to lose money. The futures may close at the end of the day at one price and open the next day at a much different price.
Day traders who close out their positions every day do not have to worry about losing money when the market opens in the morning. this method is a very important trading strategy.
Pros and cons
As explicated, in futures trading strategies the profits are high upon correct prediction. Another benefit of this trade is connected to the liquidity of the markets.
Orders in these strategies can be placed quickly, making the experienced investors get their money fast. Lastly, commissions in the trade are less when compared to other forms of investment.
Learning Day Trading Takes Longer- Learning Curve
It takes time to learn about future trading strategies in day trading. Position traders may make only one trade every week, but day traders often make many trades every day.
The number of times you enter into trades each day makes it harder to learn what you need to know about day trading.
Choose a Liquid Market in Which to Trade
Many day traders like to use the E-mini S&P 500 market for trading futures. Because the trading in that market is electronic, the E-mini S&P has the advantage of offering transactions that are very fast and liquid.
E-mini Nasdaq futures, E-mini Russell futures and Dow futures are some of the other markets, and each market has different features.
» Why market liquidity matter?
How does buying in "Going Long" make money from an expected rise in price in Futures Trading Strategies?
Do you have reasons to expect that a commodity's price will increase soon? If so, then you would start by buying contracts for that commodity now.
What happens if you were right about predicting that price increase? You'll earn profits by selling those contracts when they are worth more money later. However, if the price falls instead of rising, you will suffer a financial loss.
How does selling in "Going Short" earn profits from an anticipated fall in price?
These strategies are exactly the opposite of the going-long strategy. You go short by selling your futures contract when you believe the price is about to go down soon.
What happens if the price does decrease later? You can purchase the same futures contract again at a cheaper price to make money. The difference between your selling and buying prices determines your amount of profit.
How does a spread work in Futures?
Spreads are another one of many other strategies that you can use as well. Here, you will profit from the difference between the selling and buying prices of two separate contracts of the same commodity.
When you expect a change in both the buying and selling prices, you take advantage of these price changes to make money. You can go long on one contract and short on the other, or you can buy and sell two independent contracts at the same time with different dates of delivery.
How does a "Stop Order" work?
It's important to put limits on the amount of money that you're willing to lose in your futures contracts. That's why you make a stop order, which is a plan for your broker to sell or buy your futures contract whenever its price hits your limit.
Before you start day trading futures, you should learn about the details of each market so you can make the best choice (our Wiki can help you). Also another powerful trading strategy.
You need to be well trained and careful to be successful at day trading futures. When new traders start to learn more and gain some experience, it is easy to make mistakes that can cause problems and cost too much money.
Some of those mistakes include making risky trades and trading more than you can afford. You should be cautious and organized to succeed at trading. You must also remember that the cost of trade commissions will take part of the profits you make in day trading.
Do not forget to use these 3 trading strategies on your next trade!
Want to start Day Trading?
External useful resources
- Trading Strategies for Crude Futures - Zacks
- Popular Commodity Option Trading Strategies - Carley Garner