4 Futures Trading Strategies: Full Analysis From An Expert
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There are plenty of ways that people can make money in this day and age. That said, one of the most well-proven methods is trading. Trading can be done through many different mediums from forex to stocks to futures trading.
To help us understand more about futures trading, we’ve got Ezekiel Chew, a world-renowned trader who has trained everyone from retail traders to large institutions.
In this review, we take a look at futures trading, how to start, and which trading strategies work.
4 Futures Trading Strategies
In many ways, futures and options are very similar. But the main difference is that with futures, the buyer is obligated to buy and sell a financial instrument at a given price. Options do not hold traders to such obligations.
This simply means that to trade futures, you must buy or sell within a certain period provided the holder’s position is open before the expiration.
Future prices will depend on the underlying asset, the futures market price as well as the date of expiration. This is also the case with options. Such assets can be things like precious metals, currencies, stocks, and even natural gas.
One thing to always keep in mind is that futures are standardized contracts. This simply means that the quantity of an asset is well set and known. Many advanced traders will also similarly use futures to options to make speculations on certain markets.
So, why should you go with futures over options?
Well, when it comes to options, a trader can either buy or sell. Options are also less liquid. The contracts are also quick to lose value. A buyer needs to contend with the fact that an options contract can expire while being completely worthless thus causing them to lose money.
On the other hand, with futures, there is the obligation to trade (buy or sell) which makes futures among the better trading decisions compared to options. Furthermore, futures move fast which means that a trader can get into the market and get out fast.
The options price movements correlate with futures prices. Options, therefore, have a time decay and will lose their contract value as prices move closer to the expiration date.
let’s take a look at some proven and successful trading strategies.
#1. The Pullback Strategy
If you are just starting trading futures one of the best strategies that you can learn is the pullback strategy. This strategy involves taking advantage of the pullback. Price pullbacks occur after a price run either to the upside or the downside.
When prices are rising they will blow past a resistance line. This resistance level is an area where prices will mostly not go beyond. Having done that the price will come back and retest the resistance point. At this point, the resistance becomes a new support level. The price will then go back to an uptrend. This is the point most traders will take a long position.
When the futures market is in a bearish trade then you will do the opposite. Find a support level that is well established. Wait for the prices to go below this support level. The level will now become a resistance point and the prices will pull back and retest this level.
The traders can then expect prices to continue downwards from this level.
As traders begin to take their profits, they cause a pullback. This profit-taking causes the price to move in the opposite direction. The traders that missed the initial move can wait for the prices to go back to the resistance or support levels and enter a trade. They then cause the prices to go back in the original direction of the trend.
There is a technical phenomenon that happens here. A support level that is well established will later become a resistance level. This is a phenomenon that you can see in the larger timeframes as well as the shorter time frames.
When you choose the pullback strategy you must figure out where is the best point to exit the market. In case of an uptrend, you will place your stop loss under the support level. Your take profit should be the most recent highs. You will do the opposite with a bearish trend.
#2. Trading the Range
You will also be utilizing support and resistance levels when trading the range. This strategy is centered around the price bouncing out of the support and resistance levels. some markets such as the stock market are always trending. Other markets like the forex market are always in a range.
Trading the range is based on the assumption that human beings are emotional and therefore have memory.
A resistance point is created whenever prices fail to go over a certain level. By changing your screen to a larger timeframe you can see major resistance points. Traders understand that prices are unlikely to go beyond a certain point and will therefore ser there take profits near a resistance level.
Other traders understand that prices are likely to turn direction once they reach a certain resistance level. Based on this, they are all the more likely to open a short position. The combination of traders selling and closing positions exerts pressure thus pushing down prices.
Similarly, whenever prices fail to go down past a certain level, that level becomes a support level. The traders we mentioned above who took short positions would place their take profit at this point. A trader looking to enter the market and take a long position would do so at a support level. this causes pressure on the prices thus pushing them back up.
What traders who want to use this trading strategy should first and foremost understand is and determine is whether the prices are trading in a range. This simply means that the prices would be trading sideways without any higher highs or lower lows forming.
While the stop losses are placed near the support level in case of a long position and near the resistance level in case of a short entry, it is important to give room for unexpected breaks or volatility.
#3. Breakout Trading
When the market has been trading sideways for a decent amount of time, there is a likelihood that it will break through previous support and resistance. This is called breaking out or a “break out”. Some traders look out for this type of setup looking to capitalize on it. Breakout trading is one of the most popular methods of trading out there.
This powerful futures trading strategy also incorporates several chart patterns including pennants, triangle patterns, and head and shoulders patterns. Such pattern formation shows that the trend is likely to continue. After a market has “broken out” there is usually an initial period of volatility rise. This is because most pending orders will already be executed. Breakout traders understand this and will thus take trades in the direction of the breakout.
Breakout traders will also use pending orders such as the sell stops and buy stops to make the most of the brave. The pending orders will be executed and now become market orders when prices reach the set level. This, therefore, means that traders don’t have to wait for prices to reach a certain level and can then set the trader beforehand.
The stop-loss order in case of a long entry would be set below the resistance level while the stop-loss order in a short position would be placed above the resistance or breakout level.
As futures price movement will make retracements or pull-backs traders who missed the initial move can get into the market. As far as take profit goes, you can set this at the recent highs or lows.
#4. Bad Futures Trading Strategies
There are many different types of futures trading strategies available. That said, some are either too complicated while others are simple or bad strategies that don’t work. let’s find out exactly what not to do when trading futures
Something to keep in mind is that you should only trade highly liquid markets. how liquid a market is can be determined by finding out the number of sellers and buyers that are at each price point or level.
The benefit of highly liquid futures markets to a trader is that it is easy to get into the market and get out. This is not something that you get with markets that are not highly liquid. There is a chance that you may end up with huge losses because of just this fact.
Scalping is also not a good idea. While scaping is practiced by many experienced traders the downside is that it often relies on the one-minute timeframe. One of the main reasons why most traders prefer scalping is that they can make money fast and don’t have to wait.
However, this also means that there is a risk of incurring many losses if you are not familiar with the trading strategy.
Only advanced traders that are coolheaded are highly disciplined and have plenty of practice end up becoming successful using the scalping strategy for trading the futures market. If you are a novice trader, you are far better off sticking with more long-term trading strategies.
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Conclusion: Futures Trading Strategies
There are many trading strategies that you will find when you start getting into futures trading. Some of them are great but a large percentage of them are not.
Scalping is one of those futures trading strategies to avoid especially when starting. You are far better off learning the pullback strategy, the breakout strategy, or the trading the range.
These futures trading strategies are simple to learn and implement. Plus they have been tested over the years. There is a reason after all why the strategies are popular.
Futures Trading Strategies FAQs
Do futures traders make money?
Yes in the US, successful futures traders make anywhere from $32,000 to well over a million. The average salary of futures traders is around $203 812. While futures traders do make decent money, it takes practice to become a successful futures trader.
Which indicator is best for future trading?
The moving average is a good indicator to use in futures trading. This is because the trader can use the MA to tell him or her when the prices are breaking a support or resistance line.