To be successful in the futures market you need to be proficient in multiple futures trading strategies. This guide will cover trend following, spread trading and breakout trading.
Takeaways
- Different futures trading strategies like trend following, breakout trading and spread trading are suited for different market conditions and trader preferences each with its own techniques and risk.
- Futures trading requires a complete trading plan that includes clear goals, risk management like stop loss and position sizing and a trading platform that suits the trader’s needs.
- Traders must be adaptable to market changes and update their strategies as per changing economic conditions, regulatory changes and technological advancements to stay ahead in the futures markets.
Futures Trading 101
At its core futures trading is about dealing with futures contracts which are agreements to buy or sell an underlying asset at a certain price and date in the future.
Traders in this space must be aware of the contract specifications and tactical approaches that sync with the market.
Trading futures goes beyond just buying when prices go up or selling when they go down.
They require mastering ways to turn these into profitable trades.
Simple yet effective techniques like trend following to more complex methods like spread trading are the foundation upon which solid futures trading plans are built.
These strategies enable traders to navigate the complexities of multiple commodities across multiple exchanges and platforms through:
- Trend following
- Spread Trading
- Options Trading
- Scalping
- Swing Trading
By learning these and applying them to your trading you will increase your chances of success in the futures trade environment.
Trend Following Strategy
Trend following is like surfing the market. It’s buying futures when they are trending up and selling when they are trending down, relying on the momentum of the current trend.
The basis of this approach is based on the idea that once big price movements start moving in a certain direction whether within or outside the stock series, they tend to continue. Those who use this method use technical analysis tools to identify these movements early and ride them until they top.
This approach has its own risks. Reversals can happen suddenly and turn profitable positions into losses. That’s where technical analysis skills come in: tools like ADX and Aroon oscillator become your lifeline as you navigate through the choppy waters of market volatility.
Breakout Trading Strategy
Breakout trading is the answer for futures traders who want to catch the big price movements that emerge from consolidation periods like a phoenix rising. This approach is about being at the front of the market moves by entering trades as an asset breaks out of its previous boundaries.
With a keen eye to spot real breakouts and the courage to face the market, this trader is looking to catch these points with increased volume and expectation of a trend.
There is a danger in this approach: distinguishing between real opportunities and fakeouts. The skill of breakout traders is not just to see the initial move but to confirm it by watching how prices retest the previous breakout levels, giving you a second verification signal of where the market really is.
With exit strategies and knowledge of support and resistance after a breakout, traders using this method navigate through the choppy waters and from stagnant markets to trending markets.
Range Trading Strategy
In the ever changing market trends, a range trading strategy gives traders a framework to work in, it defines the boundaries of the asset price. In this approach traders buy futures at the lower support levels and sell at the higher resistance levels, they are exploiting the predictable price movements between these levels.
This approach requires discipline. Not all market conditions are suitable for range trading. For those who want to navigate this waters successfully, there must be an awareness of when exactly these strategies apply. By using tools like Pivot Points and volume indicators in their analysis, range traders can measure the strength behind the market moves and chart a course through the changing tides of price action.
Mean Reversion Strategy
Mean reversion is a concept of balance from the perspective of futures traders, based on the idea that prices will go back to their long term average. This approach sees market volatility not as chaos but as a pendulum swinging back to equilibrium. Practitioners of this method are looking for securities that have deviated significantly from their mean in anticipation of them going back to it.
Mean reversion practitioners use tools like RSI and Stochastic to know when assets are overbought or oversold and to time their entries and exits. It’s an approach that requires discipline and precision. They wait for the market to correct itself and restore the balance.
Momentum Trading Strategy
Momentum trading is basically to capitalize on the idea that “the trend is your friend”, to ride the momentum to make profits. This active approach is to get in as the asset goes up and get out as it goes down, always looking for the trend to guide trades.
In commodity markets this approach works best. It’s not constrained by the short selling rules in the stock markets which gives traders the freedom to use futures products for their strategies. Momentum traders use tools like on-balance volume (OBV) to make sure price movements are not just superficial but supported by real volume – the market is committed to the direction.
Spread Trading Strategy
Spread trading is the strategist’s game of chess, a calculated move where you buy and sell correlated futures contracts at the same time. It’s a game of precision where each move is designed to profit from the price difference between the contracts. With risk management in mind, the spread trader uses this strategy to exploit the pricing inefficiencies whether in bearish or bullish markets.
The spread trading chessboard is big, covering commodities like oil and agricultural products. Here the trader looks to profit from the convergence or divergence in the prices of these correlated futures contracts, always aware of the market factors that move the price. It’s a game that requires market insight, spread trading knowledge and the subtlety to execute trades that depend on the nuances of the futures market.
News Trading
News trading is the market pulse, a strategy that uses the heartbeat of global events to make trading decisions. It’s the fast response to the ripple effect of economic news, anticipating and then capitalizing on the volatility that follows. From interest rate changes to geopolitical events, the news trader must forecast the market sentiment and be ready to act.
In the news trading crucible, speed is key as traders position themselves before and after the news release. Using advanced tools like NLP for Precision News Trading, traders dissect news content to know the sentiment and potential impact and position themselves in front of the trades. It’s a high risk game where the informed trader can use the news to navigate the shifting sands of the financial markets.
Conclusion
The futures trading strategies we’ve discussed, trend following, breakout, trading within ranges, mean reversion, momentum, spreads and news trading are the tools to help traders navigate and profit from the volatility in the market. By having a solid futures trading plan with proper risk management and using the right trading platform, traders are ready to succeed.
But most importantly, traders must be flexible, a lesson we’ve learned. As markets change and complexity increases over time. So traders must adapt.