Top Futures Trading Strategies: Your Journey Begins Now

Top Futures Trading Strategies: Your Journey Begins Now

A common trading tool, futures get their price from the underlying financial instrument.

A clear trading plan that limits your risk and helps you steer clear of emotional trading is essential if you want to learn the basics of futures contracts and develop into a profitable futures trader.

Our top futures trading methods, along with an explanation of each, are listed in this article. 

Exploring Futures: An Overview

Popular financial contracts known as futures require both parties to transact an asset at a predetermined upcoming date and a predetermined price. Futures traders are bound by the conditions of the futures contract by the time of its expiration, regardless of the current market price, unlike options traders who have the right but not the responsibility to execute their option.

The underlying asset’s current market value, the contract’s expiration date, and other factors determine its pricing. Physical commodities like oil, gold, copper, and natural gas, as well as financial instruments like stocks and currencies, are common underlying assets for futures contracts.

Because futures contracts are standardized, the quantity of the underlying asset is always specified with precision. A futures contract measuring precisely GBP 62,500 is available for the British pound, 10,000 MMBtu (million British thermal units) for natural gas, 1,000 US barrels for crude oil, and 100 fine troy ounces of gold.

The most popular uses of futures contracts are for speculating and hedging. For instance, by purchasing a corn futures contract with a fixed price and execution date, a farmer may wish to hedge against declining maize prices. In this manner, the farmer is aware of the price at which he can sell his produce beforehand.

The Pullback Strategy

Based on price pullbacks, the pullback technique is a potent futures trading tactic. When the price breaks above or below a support or resistance level in a trending market, it reverses and retests that level once more. This is known as a pullback.

Prices break over a known resistance level during uptrends, reverse, and retest the level of resistance. A trader would enter with a long position in the direction of the underlying uptrend after the retest was finished.

A trader entering a short position in the direction of the underlying decline would do so because this is a retreat.

When traders begin to book gains, the price moves away from the original breakout and pullbacks are created. In order to enter at a more favorable price and drive the price higher, market participants who missed the initial price move are waiting for the price to return to the broken support/resistance level.

Pullbacks capitalize on a significant characteristic observed in technical analysis. A level shifts into a resistance or support level, depending on whether it breaks through a significant support or resistance level.

Trading Range Strategy

Trading the range is the practice of trading a chart’s rebound off significant support and resistance levels. Certain markets, like equities, prefer to trend, but other markets, like currencies, prefer to trade in a range.

Market players will refer to a price level as a resistance level when the market is struggling to break above it. Once the price hits the same level again, traders will begin to take profits and others will enter the market with short positions, which will both put further selling pressure on the financial instrument and probably drive the price down.

On the other hand, market participants who have already been shorting the market may start taking profits when the price struggles to break below a particular level and reaches that level again. Meanwhile, other market participants may start buying at those lower prices, both of which will increase buying pressure on the financial instrument and probably drive up the price. We call those levels “support levels.”

The first thing you should consider while trading the range is if the market is truly trading in a range (sideways). The current market environment is probably a range market if there are no greater highs or lower lows in the price, which are both indicators of a moving market.

As an alternative, you might employ technical indicators that follow trends, such as the ADX indicator. If the ADX is less than 25, it indicates that there is no trend in the market.

If you are buying the market, place your stop-loss levels just below an important support level, or just above an important resistance level if you are shorting the market.

If the trading support or resistance level is broken, you don’t want to stay in the trade, so set your stop-loss level close to the level but give yourself wiggle room for false breakouts, volatility, and market noise. It is advisable to position profit objectives in close proximity to significant technical levels, S/R zones, and recent highs and lows. 

The Breakout Strategy

Among futures traders, breakout trading is one of the most well-liked day trading strategies. Breakout trading, as the name implies, is to profit from market volatility that arises when the price breaks out of technical levels such as horizontal S/R levels, trendlines, channels, and chart patterns.

Rectangle, pennant, triangular, and head and shoulders formations—which generally indicate a continuation of the underlying trend—as well as double tops and bottoms, are popular chart patterns used in breakout trading. 

Immediately following a breakout, the market typically becomes more volatile as many orders that were pending are filled. Those that trade breakouts attempt to profit from the increase in volatility by positioning themselves in the breakout’s direction.

Breakout day traders frequently employ pending orders to enter a breakout trade. Orders that are still pending, like buy and sell stops, turn into market orders as soon as the price hits the predetermined level. In this manner, traders can take advantage of the successive volatility without having to wait for the actual breakout to happen.

The technical level where the price broke out is typically where stop-loss levels are positioned, either slightly above for short options or slightly below for long positions. Frequently, markets experience pullbacks to the broken technical level, allowing traders to increase the size of their open positions and welcome new participants into the market.

Take-profit objectives vary according to the kind of breakout. A head and shoulders design, for instance, projects a profit objective equal to the pattern’s height, which is determined by projecting the pattern from the breakout point and measuring from the neckline to the top of the head.

The profit objective for triangle and rectangle patterns is the same as the height of the patterns, as measured from the base.

The Trend Strategy 

Trend-following methods are among the finest for trading futures. They are fairly simple to follow, have a track record of success, and are usually successful.

As the name implies, trend following tries to move in the direction of the underlying trend. A trend-following approach would only search for appropriate long positions if the trend was upward. Similarly, a trend-following approach would only search for possible short positions if the trend was downward.

The proverbs “buy low, sell high” and “the trend is your friend” may be familiar to you. However, how can a trader determine what “high” is sufficient and what “low” to buy?

In order to address that crucial query, let’s briefly discuss the formation of trends. Price reaches higher highs and lower lows during an uptrend, with each higher low signifying a move against the trend. These countertrend swings are price corrections that arise from sellers beginning to press an overextended up-move lower, or from profit-taking actions.

During an upswing, the bottom of the price correction, or the higher low, is the ideal opportunity to buy. This is the precise moment to start the underlying rise again. The same applies to downtrends; the difference is that you would start a sell position at the peaks of lower highs.

The Interest Strategy

To determine whether to purchase or sell a futures contract, traders use the interest data of both buyers and sellers. The Depth of Market (DOM) window, which displays the quantity of open buy and sell orders for a futures contract at various price points, indicates buyer and seller interest.

The liquidity for the underlying security is displayed by the depth of the market; higher liquidity is indicated by more market orders at each price, and vice versa.

Since it displays the quantity of pending orders for the underlying security or currency, some brokers refer to the Depth of Market as the Order Book. Real-time updates are made to these lists to reflect the most recent trading activity in the market.

Conclusion

With proper risk management and a clearly defined trading strategy, futures trading can be a very profitable and thrilling endeavor.

Most of the mentioned strategies utilize price action trading as the technical analysis of data is vital for any profitable trader. If you are a novice in the market, however, consider utilizing the pullback method. Retail futures traders like this trading strategy the most. We also recommend trading in the direction of trends and employing trend-following tactics.

Regardless of the trading approach you use, always trade in liquid markets and close your positions over the weekend (if you are a day trader) and overnight (if you don’t want to take on further risk.)

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