Futures Trading Strategies

Futures Trading Strategies Guide

7 min read

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. 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.

2. 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. 

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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?

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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