Futures contracts trade in a dynamic and fast-moving market, and it’s not for everyone. Trading futures expertly takes knowledge, skill and a robust risk appetite. Futures trading is a zero-sum game; for every profit, there is a loss. Futures traders can and do make money, but consistent performance depends on using the right strategy.
Successful futures traders understand the markets, and they use tried and tested processes to profit from price changes. Decision-making is typically unemotional and based on a fundamental and technical understanding of market trends.
Advanced Trading Strategies for Futures Contracts
The goal in trading is often to use profitable strategies that the rest of the market hasn’t already squeezed the profit out of. Advanced trading strategies for futures contracts could help you maximize your chances for profits.
1. The Pullback Strategy
Pullback strategies take place in a trending market when the price breaches resistance or support levels, retreats and then returns to the resistance or support level. Resistance and support levels are levels above and below which the price often stabilizes. They can mark the top and bottom price range of an asset.
Using the pullback strategy, you could identify an upward price trend in a futures contract, wait for the price to retreat and then open a long position in anticipation of increasing prices. With a futures contract on a downtrend, you could short the contract after it has gone higher. Pullback strategies can work across different timeframes, although they are typically better over the short term. Traders who pick up early trends and use technical analysis to identify price levels often use the pullback strategy.
2. Futures Spread Trading
Futures spread trading involves taking simultaneous long and short positions. The strategy allows you to mitigate risk while benefiting from price changes by covering changes in both directions. The spread generally won’t return as much profit as a contract on a single price direction, but it does reduce the risk of losing money.
Examples of futures spread trading include:
Intramarket: Also known as calendar spreads, here is where traders choose different expiration dates on the same future.
Intermarket: Traders enter contracts for several related futures simultaneously.
Commodity products: Traders take a long position on the commodity raw material and a short contract on a finished product that was created with that raw material.
3. Breakout Trading
A breakout happens when stock prices move above the resistance or below the support level, accompanied by increased trade volumes. Breakout traders take a long position when stock prices breach the resistance level and take a short position when the price drops below the support level. The aim is to enter the market as the price breaks the traditional price range and then make the most of the trend until it settles down again. This strategy is used when prices are volatile. The secret to making money using breakout trading is to time the market exit well.
4. Range Trading
Range trading is most commonly used when there are no apparent market trends. Trader use range trading to buy in trading channels using charts and trendlines to buy at lower levels and sell when prices increase.
5. Trend Following
Trend following as a strategy is somewhat of a go-with-the-flow strategy. The assumption is that trends in price will continue, so you would buy during an upward trend and sell during a downward trend. Trends can be identified using technical or fundamental analysis.
Benefits of Futures Trading
Futures trading has its ups and downs but can offer a few advantages:
Leverage: Futures traders use leverage to buy and sell contracts. Traders typically provide just 10% of the contract value, relying on leverage for the rest. This practice gives futures traders more exposure to the market than they would have if they traded in stocks. Opportunities to make profits or rack up losses are amplified.
Low costs to trade: Commissions, paid at the close of the contract, are typically minor, with costs totaling as little as 0.5% of the contract value.
Markets are liquid: Traders can enter and exit futures markets as and when they please.
Tax benefits: About 60% of the net gains from futures contracts fall under long-term capital gains tax, so the tax rate is lower than the tax on employment income. The remaining 40% is taxed as general income.
Product diversity: Futures trading cuts across currencies, commodities, and indices, offering plenty of opportunities for traders to trade in the markets they prefer or understand best.
Low barriers to entry: Flexible contract sizes and available leverage mean that people can trade in futures even when they don’t have much money to invest.
Drawbacks of Futures Trading
Drawbacks to futures trading exist.
Expiration dates: All futures contracts contain expiration dates and might become less attractive to trade as the contract reaches the end date because it converges on the underlying spot price.
High risk of loss: Because of the high leverage available, futures trading brings with it the risk of heavy losses.
No control over events affecting futures prices: Futures prices are affected by uncontrollable events like weather and political instability. Such circumstances could completely disrupt the balance of supply and demand, affecting futures prices in one way or another.
Time requirements: Some futures markets are open 24 hours a day. Day traders spend a lot of time watching the markets. If you don’t have time to spend watching price movements and analyzing trends, futures trading may not be for you.
Not all futures are SIPC insured: Security Investor Protection Corporation (SIPC) insurance won’t cover a reduction in prices. It also won’t cover all types of commodities futures.
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Frequently Asked Questions
What are the most profitable futures?
The most profitable futures trades are not necessarily predictable because futures prices move quickly, and the contracts are as diverse as the people who trade them.
How can you avoid losing money on futures trading?
You can try not to lose money on futures trading by performing research, thoroughly understanding the fundamentals and sticking to a strategy. Using tools like stop-loss orders can also limit losses and help protect you from significant drawdowns. However, you have no guarantee that you will earn a profit.