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Trading in the futures market requires expertise and a significant tolerance for risk. A loss mirrors every gain and although profitability is achievable, consistent success depends on using effective strategies.
Skilled futures traders deeply understand the market and use proven trading strategies to capitalize on price fluctuations by making objective decisions grounded in fundamental and technical analysis.
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Advanced Trading Strategies for Futures Contracts
Futures contracts are a versatile way to participate in various markets, from commodities and currencies to interest rates and stock indices. Several advanced trading strategies can be used to trade futures contracts:
The Pullback Strategy
The pullback strategy is a popular and potentially effective trading strategy based on the idea that after a significant price movement in one direction, the price will temporarily reverse or “pull back” before continuing in the original trend’s direction.
Investors using this strategy try to identify the temporary reversals and enter trades in a long position in anticipation of rising prices. In a downtrending futures contract, a pullback strategy involves shorting after a temporary upward price movement.
Investors who identify early trends and use technical analysis to pinpoint entry levels often favor pullback strategies for short-term trading.
Futures Spread Trading
Spreading involves taking long and short positions in related futures contracts simultaneously. This allows investors to profit from the change in the price difference – the spread – between them.
Futures spread trading strategies include:
- Calendar spreads (time spreads): Buying and selling futures contracts on the same underlying asset but with different expiration dates. The goal is to profit from the change in price relationship between the near-term and deferred contracts resulting from factors like storage costs, interest rates and supply-demand dynamics.
- Intermarket spreads: Taking positions in futures contracts of two different but related underlying assets. The goal is to profit from the changing price relationship between the assets.
- Intercommodity spreads: Buying and selling futures contracts of different grades or locations of the same commodity. For example, an investor could buy West Texas Intermediate crude oil futures and sell Brent crude oil futures with the goal of capitalizing on the historical price difference between the two benchmarks.
Breakout Trading
Breakout trading involves entering a trade when the price breaks through a significant level of support or resistance. The expectation is that the price will continue to move in the direction of the breakout. For example, if gold futures have been trading in a certain range and then break above the upper resistance level, a breakout trader might buy, anticipating an additional price increase.
The goal is to enter the market when the price breaks the traditional price range and take advantage of the trend until it settles down again. The key to making money in breakout trading is timing the market well.
Range Trading
Range trading involves identifying and trading within an asset’s specific price range. The price levels act as resistance (the upper boundary where selling pressure tends to prevent the price from rising higher) and support (the lower boundary where buying pressure tends to prevent the price from falling lower).
Range traders try to capitalize on sideways price action by buying near the support level, anticipating that the price will bounce back up and selling or short-selling near the resistance level, expecting the price to drop toward the support level.
Trend Following
Trend following involves identifying and trading in the direction of an established trend. This often uses technical analysis tools like moving averages and trendlines to determine trends and entering positions accordingly. For example, if crude oil prices have been consistently rising, a trend follower might buy a futures contract, hoping the upward trend will continue.
Benefits of Futures Trading
Futures trading offers various benefits to participants, from individual speculators to large commercial organizations.
Leverage: Futures contracts allow traders to control a substantial amount of an underlying asset with a relatively small margin deposit – a fraction of the contract’s value. This leverage can amplify potential profits compared to trading the underlying asset directly and enable traders with limited capital to participate in markets they might otherwise not have access to because of high contract values.
Hedging: Futures contracts are powerful tools for hedging against price fluctuations. Businesses that produce, process or consume commodities can use futures to lock in future prices, reducing uncertainty and protecting profit margins.
Liquidity: Futures markets are characterized by high liquidity because many buyers and sellers are willing to trade. This enables traders to enter and exit positions quickly.
Lower transaction costs: Compared to some other financial instruments, the brokerage commissions and fees associated with futures trading are relatively low, with some platforms charging just 10 cents per side based on volume.
Tax advantages: Futures trading profits may benefit from a blended tax rate, with 60% taxed as long-term capital gains regardless of the holding period. The remaining 40% is taxed as short-term gains.
Diversification: Futures markets offer access to various asset classes, including commodities, currencies, interest rates and stock indices, allowing traders to diversify their trading strategies and portfolios beyond traditional stocks and bonds.
Accessibility: Electronic trading platforms make futures markets easily accessible to individual traders. Various contract sizes are available to appeal to different capital levels and risk appetites.
Drawbacks of Futures Trading
Futures trading also has significant drawbacks that pose substantial risks for inexperienced traders.
For one thing, the Securities Investor Protection Corporation (SIPC) generally does not protect futures traders. The SIPC is a nonprofit corporation that protects customers of its member brokerage firms. It safeguards cash and securities customers of a financially troubled member brokerage firm hold. But futures contracts are not typically securities, so they aren’t protected.
Other drawbacks of futures trading include:
Time sensitivity: Futures contracts have specific expiration dates. As a contract nears its expiration, traders must either close their position, roll it over to a later contract or be prepared to take or make delivery of the underlying asset.
Risk of loss: Leverage’s main benefit is also its biggest drawback. Although it boosts potential profits, it equally amplifies potential losses. A small adverse price movement can result in substantial losses quickly exceeding the initial margin deposit.
Unexpected events: Unforeseen events such as natural disasters, political instability or sudden changes in government policies can significantly impact futures prices, leading to unexpected losses.
Time requirements: Futures markets can move quickly and positions must be monitored regularly. This can be time-consuming and may not work for people who cannot dedicate enough time to tracking their trades.
Frequently Asked Questions
What are the most profitable futures?
Profitability in futures trading depends on the strategy used, the trader’s timing and market conditions. When used correctly, techniques like spread trading, breakout strategies and trend following can be profitable. However, futures carry high risk and no contract guarantees consistent returns.
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How can you avoid losing money on futures trading?
To reduce the risk of losing money, experienced traders rely on research, clearly defined strategies and risk management tools like stop-loss orders. Avoiding over-leveraging and monitoring positions regularly is also essential, especially since small price movements can lead to outsized losses.
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What is scalping in futures trading and who is it best suited for?
Scalping is a high-frequency trading strategy in which traders aim to profit from small price movements over very short timeframes – often seconds to minutes. Futures scalpers typically place dozens or even hundreds of trades daily, using real-time charts, tight stop-loss orders and rapid execution tools to capitalize on market volatility. It’s best suited for experienced traders who can dedicate full attention to the markets, tolerate fast-paced decision-making and execute trades precisely.
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The post Advanced Trading Strategies for Futures Contracts by Margaret Jackson appeared first on Benzinga. Visit Benzinga to get more great content like this.