05 Jun 3 Futures Trading Strategies for Beginners
Do you have a pile of cash sitting in a bank right now and earning the measly 0.1% interest? Would you rather leave the money inside a vault, or put the money to work and make more?
If you’re looking to become the next Warren Buffet, futures trading is one of the options that can take you there. In this article, we’ll discuss how you can start your career in trading by learning five effective futures trading strategies.
What Are Futures?
The financial concept of “futures” refers to a type of financial contract giving its buyers a chance to bet on a commodity’s future price. Futures obliges the buyer to complete the terms set in the futures contract. Regardless of the current market price, the buyer must follow the price of the commodity as the contract states.
How Does Futures Trading Work?
Take a soybeans producer who wants to offset the potential risk of soy price fluctuations. To protect his profit, he buys a futures contract where both (1) the price of soybeans and (2) the transaction date suit him.
Let’s say the farmer and the seller agreed that the price of soybeans would be $15 per 1 kilogram. If the price increased to $20 per kilogram by transaction date, the farmer could not sell his soybeans to the seller more expensively than for $15. However, (and this is why it makes sense for the farmer to use futures) if the price drops to $10, the seller of the contract would still be obliged to purchase the farmer’s soybeans at $15 per 1 kilogram.
What Role Can a Futures Broker Play in Your Investment Strategy?
Futures Trading Strategies
If you’re looking into becoming a futures trader, you must learn the basics. Here are 5 must-try strategies any novice trader should know.
The Pullback Strategy: Trading Resistance & Support Levels
Price hardly ever moves all over the place. Usually, it stays within particular corridors. They can be narrow on short-term charts or very wide on weekly and monthly charts.
The top range of those corridors is called the resistance level because the price has a hard time breaking above them. Conversely, the bottom range is called the support level as the price doesn’t fall under that level easily either. However, once the price breaks above, the old resistance becomes the new support, and vice-versa.
The good news is: as a futures trader, you can benefit from both these scenarios with the pullback trading strategy.
In finance, a pullback is when the price moves against the trend. You can profit from this strategy by (1) making a purchase in the direction of the trend, and (2) placing stop-loss orders below the retested support level and above the retested resistance levels. This way, you can make money by following the trend while protecting yourself from significant losses in the event of a breakout going against the trend.
Breakout Trading
Breakout trading is another viable strategy for futures trading, and sometimes it turns out to be the most profitable one.
A breakout occurs when the price moves above or beyond the established price corridor. This is usually followed by considerable volatility as multiple conflicting orders are being executed at the same time, pulling the market in the opposite directions. Thus, by making a trade in the breakout direction, you can make a lot of money from a medium-run price movement; and if you were lucky to catch a major trend reversal, your profits will be even greater.
Trend-Following
If you correctly predict that a certain commodity price will increase after some time, buying a futures contract can let you benefit from it. If the price of the commodity increased over time, you could sell the futures contract at a higher price.
However, if you are wrong, you will lose. This is why you must observe the market before buying a futures market to avoid losses.
Following what’s trending is a basic strategy in futures trading for beginners. Let’s tackle how trends work and how you can take advantage of them.
The general rule is to trade in favor of what is trending in the market. When the commodity is no longer trending, you can opt to exit.
For instance, you observe that wireless charging stations are becoming a trend. You can buy a futures contract on wireless changing stations and wait for a while. When the price is at its peak, you can sell it more expensively and gain a profit.
How do you identify a trend? There are three common trading tools used in identifying a trend. This includes moving average direction and Bollinger bands.
For moving average direction, you can use moving averages to tell the direction of a certain trend. You can identify how sensitive a trend is by analyzing the length of the moving average.
When a commodity price gets closer to the outer Band, the trend is strong. You can buy a futures contract on the trending price as long as it closes the outer Bands. When you see it moving far, take action and immediately sell the futures contract.
Knowing the Interests of Buyers and Sellers
As a trader, you would want to make use of the data about the interest of buyers and sellers. Use the Depth of Market window to determine the number of buys and sell orders. From the data, you can decide which commodity to buy in a futures contract.
For instance, let’s say that Brent crude oil trades at $50. Using the Depth of Market window, you see 180 orders at $51, 170 orders at $52, and 100 orders at $57. You also notice 50 orders at $49 and 60 orders at $48.
From the information, you can tell that the buying side is higher than the selling one. This can help you determine whether to buy a futures contract with the commodity or not.
Starting a Career in Futures Trading?
Now that you’ve learned five effective futures trading strategies, are you ready to start trading? Take the first step and get in touch with a futures broker.
Don’t know where to find one? Fear no more; contact us and become our partner. Start your career in futures trading with us.
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