The futures market is exciting and vast. It allows you to trade futures contracts on everything from sugar and cotton to energies and interest rates. You’re not limited to 1 sector of the global economy nor to strong economic periods. Some futures are known for their high volatility and broad price swings. It isn’t uncommon for some futures to trade down in the morning but close at a high at the end of the trading day.
Experienced futures traders don’t go at it alone. They often use technical analysis and strategies to inform their decision making. Sticking to a well-reasoned and backtested strategy gives you an upper hand when executing trades. But what are the best strategies for futures trading? Let’s find out.
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Best Strategies for Futures Trading
Before you can actually enter into a trade, have a plan to guide your decision-making process. Your strategy should be based on a careful analysis of the markets you intend to trade. Some of the aspects you’ll want to evaluate include:
- What’s your objective for the trade?
- How much risk is in the trade and how much are you willing to accept?
- If the trade turns against you, at what point will you liquidate your position?
- What type of orders will you use?
- How will you monitor price movements and market developments?
The futures market offers different types of futures and numerous opportunities to profit from price movements. However, great success is generated through the use of tested trading strategies. Here are Benzinga’s favorite futures trading strategies — all backed by market research.
The Pullback Strategy
This powerful futures trading strategy is based on price pullbacks, which occur during trending markets when the price breaks below or above a resistance or support level, reverses and gets back to the broken level. Resistance levels are price levels at which the price had difficulties breaking above. Support levels are price points where the market had difficulties breaking below.
During an uptrend, the price breaks above an established resistance level, reverses and retests the resistance level. After the retest is complete, you may enter with a long position in the direction of the underlying uptrend.
During a downtrend, the price breaks below an established support level, reverses and returns to the support level again. This represents a pullback and you may enter with a short position in the direction of the underlying downtrend.
Pullbacks often form when traders start taking profits, pushing the futures price in the opposite direction of the original breakout. Traders who missed out on the initial price move can wait for the price to get back to the resistance or support level to enter a more favorable price, pushing prices up again.
You can buy futures contracts if you’re expecting the price of an underlying commodity to increase over a certain period. If your forecast of the direction and timing of the price change is accurate, you can sell the futures contracts later for a higher price, consequently yielding profit. If the price decreases, however, your trade will result in a loss. Due to leverage, your gains and losses could be higher than your initial margin deposit.
Breakout trading is a popular approach in day trading. A breakout occurs when an underlying asset’s price moves out of an established trading range. Breakout trading purposes to catch the market volatility when the price is breaking out of support and resistance levels, trendlines and other technical levels.
The breakout movement is often accompanied by an increase in volume. Here, you look for a narrow trading range or channel where volatility has diminished.
The market experiences great volatility after a breakout occurs. This is because numerous pending orders are executed. You may try to take advantage of this volatility rise by taking a position in the direction of the breakout. The general idea is to go short when prices break below support and go long when prices break above the resistance level.
The spread trading strategy involves the purchase of 1 futures contract and selling another futures contract at a different time. The aim of this strategy is for you to profit from an unanticipated change in the relationship between the buying price of 1 contract and the selling price of the other futures contract.
Spread trading lowers your risk in trading. Each spread is a hedge. Trading the difference between 2 futures contracts results in lower risks to a trader. Spread trading is also not affected by market volatility.
Best Brokers for Futures Trading
The futures market is a high-risk and complex endeavor. It can be difficult to master and needs patience, the right strategy and some guidance if you’re just getting started. Having the right futures broker to complement your trading experience and style is the first step toward success.
The best broker for futures trading should offer the right balance for an intuitive platform, low commissions, up-to-date resource offerings and excellent customer service. Here are our suggestions for the best brokers for futures trading.
TD Ameritrade is one of the big boys in the industry, with great platforms for rookie traders, experienced and active traders. The brokerage requires a $1,500 account minimum, and lets you trade 70+ futures products on a virtually 24/6 market.
The company also boasts a power platform — thinkorswim — which allows you to enter and execute trades fast. Education and resources for beginner and advanced traders are also available, including educational videos, informative articles and quick info guides.
The company’s ThinkBack feature lets you back test proven futures trading strategies. Customer service is also excellent, thanks to its futures specialists who have more than 100 years of combined trading experience.
InteractiveBrokers earns our lowest-cost broker rating by offering the lowest commissions and trading margins in the business. Commissions stand at $0.85 while margin rates are between 1.41% and 1.91%. The brokerage’s configurable trading platform gives you access to 50+ futures order types. It also has a mobile app that’s supported on Android and iOS.
Access to foreign markets isn’t limited and insights into these markets are available from Interactive’s futures arbitrage tables and daily interest rates. The brokerage also features a host of tech offerings, including customizable order types and programmable hotkeys for easier trade monitoring. You’ll need a $10,000 minimum deposit to open a trading account.
TradeStation allows you to diversify your investment portfolio with access to 350+ futures and futures option products. The brokerage has 2 distinct account types: TS GO, meant for beginners, and TS Select, aimed at the more experienced traders. No minimum account balance is needed to open a TS GO account. A $2,000 minimum account deposit is required to open a TS Select account.
TradeStation also excels in educational resources, offering a wealth of learning options for new traders and professional investors. TradeStation allows you to trade futures online, on your desktop or mobile application. Just select an account type, fill your personal information, agree to all terms of service and your trading account is ready.
NinjaTrader’s discount pricing and low margins let you save on your futures trading costs. Trading commissions start as low as $0.09 per micro contract — if you have a lifetime license. Margins are $50 for micros and $500 for E-mini futures.
You can open a futures trading account with only $400. Award-winning charting and analysis, professional market data, 100+ indicators and hundreds of 3rd-party trading apps are among the tools and services the brokerage offers to support your trading.
The company’s high-performance backtesting engine lets you simulate automated trading strategies on historical data. Educational offers are also in plenty, including training webinars, exchange education from the world’s leading exchanges, weekly free events and trader resources for various asset classes.
Stick to Your Trading Strategy
Failing to plan is planning to fail, so choose a strategy and stick to it. Futures trading is fraught with risk; discipline can be the difference between huge profits and devastating losses. The strategy you choose will guide your decision making, and you shouldn’t let emotions get in the way of making appropriate trading decisions.
Whatever works for another trader might not work for you, so pick a strategy that aligns with your objectives and trading style. Simulate your plan on a trading software before putting it into action. Ultimately, the right strategy will give insight into maximizing your winning trades while minimizing the losing ones.
Are you interested in learning more about futures? Head over to Benzinga’s Futures & Options Courses.
AMP Global is a CySEC-regulated forex, CFD and exchange-traded futures brokerage and brings the American trading experience to Europe.
Through AMP Global world , you can enter the world futures exchanges while trading forex and CFDs with your all-in-one Metatrader 5 account. This trading solution gives AMP Global an edge over rival firms.
You can get a free exchange-traded futures, forex, metals and energies demo trading account to learn how to trade, risk-free. If you’re an experienced trader, you may want to test Expert Advisors, manual strategies or run back-testing on historic chart data.
Once you’re ready to start trading, you can get a trading account, Islamic account or corporate account for companies.
Get started with AMP Global today.