Futures trading strategies

At expiry, your position is liquidated and you account is either credited or debited depending on the entry and position. According to the Dow theory, a price correction reaches on average 50% of the initial impulse move. In terms of Fibonacci levels, look for retracements between 38.2% and 61.8%. Some brokers refer to the Depth of Market as the Order Book, as it shows the number of pending orders for the underlying security or currency.

Futures trading strategies

Theory becomes your best friend, and hypothesizing correctly is the key here. This strategy is used when you are faced with a bull market and uncertain volatility. But if you have an opinion on where the volatility is heading, another strategy may be better. The first thing to notice in the chart below is the lower horizontal blue line, that was a line in the sand for the bear structure continuation. Once we broke that level and plunged lower, there was a chance for the breakout short. However, if you did not manage to catch that, the opportunity for the fade long arises.

Basis Risk for Long and Short Hedges

Similarly, stop-losses should be placed above the retested resistance level (previously support) during a downtrend, with profit targets set at recent lows. During uptrends, the price breaks above a well-established resistance level, reverses and retests the resistance level. Once the retest is complete, a trader would enter with a long position in the direction of the underlying uptrend. Futures contracts are most commonly used for hedging and speculation purposes. For example, a farmer may want to protect against falling corn prices by buying a futures contract on corn with a predetermined price and execution date.

  • The following chart shows how the price usually behaves around important support and resistance levels.
  • And, in futures trading, selling first is just as easy as buying first—the positions are treated equally from a regulatory point of view.
  • The manufacturer can hedge its position by taking a long position in futures contracts and closing its position on 15 July.
  • The value of digital assets can increase or decrease, and you could lose all or a substantial amount of your purchase price.
  • Its banking subsidiary, Charles Schwab Bank, SSB (member FDIC and an Equal Housing Lender), provides deposit and lending services and products.
  • All examples listed in this article are for informational purposes only.

Most futures contracts are not held until their execution date as they can be regularly traded through an exchange. The price of a futures contract depends on the current market price of the underlying instrument. An unexpected strengthening of the basis worsens the hedger’s position since the hedger needs to pay a higher price for the asset after considering gains or losses from the futures contract. The above examples are all perfect hedges eliminating uncertainty in the futures prices; but in practise, hedging also involves an inherent risk known as basis risk.

Tips Every Futures Trader Should Know

A futures contract is a legal agreement to buy or sell an asset at a predetermined price at a specified time in the future. All traders have at one time or another found it difficult to consistently find new trades from their watch list; adding options on futures markets can help expand your watch list to find more trades. If you already have trade set ups for equity options, you benefit from the ability to apply those same set ups across all futures markets, thus giving you access to more trades. Following the same rationale, the hedger’s position worsens with an unexpected weakening of the basis. To conclude, these two futures trading strategies are very profitable if used correct.

Futures trading strategies

This strategy is seldom done with more than two excess shorts on account of downside risk. This is the strategy to use when you feel the market will continue its bull run yet defy the herd mentality to some degree. If you want to benefit from the bull market and are unsure, this strategy is perfect. 2 choices can be made depending on your confidence that the markets will slide.

Buy Futures

Active traders should select a futures platform with a mobile trading app that lets them execute trades and manage positions on the go. If you’re a new futures trader or a veteran that has hit a rough patch, you might also consider downsizing your contracts. In some cases, exchanges offer E-mini futures and Micro E-mini futures products that are identical to standard futures products except smaller. The CME Group, for instance, offers an E-mini S&P 500 futures contract that’s identical to its flagship S&P 500 futures contract, except it’s just one-fifth the size.

  • It enables individuals to trade on the price movements of a wide array of assets, including stocks, commodities, currencies, etc.
  • Trading the range refers to trading the bounce off important support and resistance levels in a chart.
  • However, if you are wrong about the market’s direction or your timing is off and prices ultimately fall, then you will take a loss when you exit the position.
  • You should obviously monitor your working orders, open positions, and account balances.

You must identify an uptrend and wait for the price to retreat from its highs, getting an opportunity to buy the asset in the future at a lower price. You can profit by selling the future as the price resumes its upward trajectory. One of the main drawbacks of fundamental analysis is that it doesn’t provide exact price-levels to trade on, and that’s where technical analysis comes into play. Fundamentals are used to determine whether to go long or short, and technicals to set profit targets and stop-loss levels. Profit targets should be placed near recent highs/lows, S/R zones or other important technical levels. In this article, we’ve prepared our favourite futures trading strategies with an explanation of each strategy.

What Assets Can Be Traded Using Futures?

A carefully wrought trading plan that includes risk-management tools such as stop-loss orders, which we will discuss below, or bracket orders, can help protect you from such errors. For example, say you bought one contract of December silver at $20.00 per ounce. With a bracket order, you could set a stop loss exit at $18.00 per ounce and a profit exit at $25.00 per ounce. That way, you’re attempting to limit your risk to $2 per ounce, while maintaining a profit potential of $5 per ounce.

Don’t spread yourself thin by trying to follow and trade too many markets. Most traders have their hands full keeping abreast of a few markets. Remember that futures trading is hard work and requires a substantial investment of time and energy.


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