Futures Trading Strategies

Futures Trading Strategies Guide

This may seem a bit simple, but the most common futures trading strategies are to buy if you think the price is going up and sell if you think it’ll go down. Fortunately, as futures traders, we can do either at any time. We can sell something we don’t already own because a futures contract is just a commitment to buy or sell an asset in the future. The difficulty then comes in determining whether or not the price will go up or down. We’ll introduce the three most important methods to help make that decision.

1. The Pullback

The first of the futures trading strategies that nearly every futures trader learns is the pullback. The pullback is when the price breaks above or below a resistance/support level. Resistance is a point where the price has trouble passing above. At the same time, support is where the price has trouble falling below.

In uptrends, the price exceeds the resistance level and then returns to the resistance level. At this point, we enter a long/buy position and hope that the uptrend continues.  

Reversely, a downtrend price goes below a support level and returns to the support level when we enter a short position and hope the downtrend continues. 

These two pullbacks usually occur when traders start taking profits at defined points. Then, we take advantage of the continued uptrend/downtrend.

Futures Trading Strategies

This picture shows the pullback strategy while trading futures. After the rise, we close our position as the moving average line gets far away or with the bearish candlestick. After passing the moving average on the downside, it raises and moves back again. At this point, we enter the position and set our stop loss. 

2. Breakout Trading

The second most popular strategy of the futures trading strategies is breakout trading. We take advantage of volatility when a future leaves a pattern. In a simple form, we are looking for a narrowing trade range of diminishing volatility. We can also use head and shoulder, rectangle, pennant, or falling wedge to indicate a breakout. 

The volatility is closing to a point. Then, there’s a breakout with the increased volume due to pending executed orders. We’re taking advantage of this volatility rise.

We can also set our pending orders (buy-stops, sell-stops) to catch this uptick/downtick. As a result, we don’t have to wait for the volatility.  

Setting our stop-loss should be just below/above the long/short entry of the breakout, and we’ll take profits when we reach the height of the base of our triangle/wedge (pink bars above).  

When using the head and shoulders pattern, we use the pattern’s height from the neckline to the head as our take profit amount.

Futures Breakout Strategy

This picture shows the futures breakout strategy. As the price moves towards the apex point, look to enter your trade. This price shows a long entry on the breakout of the apex with a stop loss below the apex area.

3. Range Trading

The last of the futures trading strategies we’ll look at in this post is range trading. Range trading applies when we use the bounce of a chart’s key support or resistance levels. This strategy adds a human factor to trading decisions.

When a resistance level is reached, it’s hard to break above this level. When it’s reached again, some traders will choose to take profits or open short positions, causing a selling and price decrease.

On the opposite end, buying pressure is created when short sellers are taking profits or buyers are coming in when support is reached for a second time. 

The below photo shows the movement in both support and resistance levels. We want to make sure there’s a range; no breakouts are occurring with extended highs or lows.  

We can use the Average Directional Movement Index (ADX) to help measure the strength of a trend. If the ADX indicator is below 25, there is no trend. 

If you’re in the pink resistance level, you’ll buy a sell short and put a stop loss just above the key resistance top of the band. While on the opposite side of things, you’ll have a long buy in the grey band with a stop loss just below the key support bottom edge of the band.  

If the market goes outside these bands, you want to be out of the trade. This may be the time of a breakout, but you want to look for the changes in volatility, volume, and market size.

Our take profit level will be near recent highs or lows or at the support (for sale orders) or resistance (for buy orders) band.

Futures Range Trading Strategy

Pre-Planning Futures Trading Strategies

Before entering any position, futures trading strategies included, it’s best to have a strategy beforehand. This way, you’re making sound decisions rather than the mistake of gut-feel trading. You should address these five questions:

  • What’s the trade’s objective?
  • How much risk can you accept, and is the trade within that parameter?
  • What is your stop-loss strategy? 
  • When do you cut losses and get out?
  • What is your plan for monitoring the market and the price movement?
  • What orders will you use?

4. Wolfe Wave

1. Stripped to its basics, a Wolfe Wave pattern comprises five supply and demand waves
for two things. 

2. To predict where the price is going

3. To predict when it will get there.

4. Each wave represents a struggle as the price fights for equilibrium.

5. What’s fantastic is that they can unfold anytime. Regardless of your penchant for the 1-minute chart or the one-month chart, you can use this pattern.

In the picture below, we have an example of the Wolf Wave. This is a simple concept when using the broker-drawn waves, and to trade it you simply:

1. Wait until the price hits point five and buy. Your buy confirmation is a bullish reversal candlestick.

2. Take your profit and sell once the price hits the line, extending from points 1 and 4.

Futures Range Trading Strategy

5. Price Action Trading

Another approach to trading futures is trading price action with the time and sales. 

This “pure” price” met” od focuses on specific price behaviors about key levels on the chart paired with confirmation signals within the order flow.

For example – the picture below shows a chart with the previous day’s & low marked & carried forward into today’s range. The price was tested both the previous day and the previous day, and the Globex was low (we will refer to anything outside the regular trading day (9:30 to 4) as the Globex range).

Futures Range Trading Strategy

When attempting to trade key levels – we want to watch the time and sales at those highs – to see if there is a ceiling and to witness absorption. If there is a wall of sellers up there and we can’t absorb all those contracts, we will fall away from that level.

We want to watch the time and sales at those lows to see if there is a floor and to witness absorption. If there are is a wall of buyers at that level we will see price stall out there as it attempts to fill all those buy orders at that level; if we can not fill them all we will see price rise away from that level.

Regarding time and sales, you want to see orders filled (volume) while also seeing prices stall and not move. That is a great indication of too many limited orders on our path – and the price will often pull back from that level.

Pre-Planning Futures Trading Strategies

Before entering any position, futures trading strategies are included, so it’s best to have a strategy beforehand. This way, you’re making sound decisions rather than the mistake of gut-feel trading. You should address these five questions:

  • What’s the trade’s objective?
  • How much risk can you accept, and is the trade within that parameter?
  • What is your stop-loss strategy? 
  • When do you cut losses and get out?
  • What is your plan for monitoring the market and the price movement
  • What orders will you use?

By asking these questions in advance, you are prepared to manage the trade before you enter. We all struggle with the temptation to hold longer (Greed) or to get out sooner (Fear), but we do not want to make these decisions once we are in the trade; make these decisions before the trade begins.

Monitor the trade records – and learn from those past trades to make better decisions about future trades. If you are getting out too soon – change the strategy to hold a little longer (maybe a few points). Trade that new style for a few days or weeks and evaluate things again. If you are still getting out too soon, adjust again to hold for a little more profit per trade. 

If you find that you are getting out too soon – try looking into the trades you took and identify why you got out. Was there an actual signal to exit, or did you get scared? Was the signal valid – or did you move your stop too close and get wicked out?

Review the trades you took, evaluate a change in the exit strategy, and test this change over the next few days to see if the exit is improved.

Final Thoughts: Futures Trading Strategies

These are your first three futures trading strategies every trader should know. There are many more to learn, but just using these three can take you a long way.  

We highly recommend also incorporating into your research a fundamental review of an asset to help with a trading decision. Fundamentals can be the cause of reverse trends and will break support or resistance levels.  

As always, trade only what you can lose (risking a maximum of 10% of a portfolio on a single trade; lower is better), as lousy margin trades can quickly wipe out a portfolio. We wish you good luck with all of your trades!!!!

Frequently Asked Questions

  • Have a trading plan
  • Cut your losses quickly
  • Practice with micro futures before e-mini
  • Plan your trades
  • Use risk management to keep losses small
  • Use a futures broker that has solid executions
  • Save money on fees with low-cost futures brokers
  • Be patient with your strategy
  • Have a targeted focus

Futures traders who make money consistently are the ones who stick with their trading plan, do not chase trades, and keep their risk management profiles steady.

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