The Best Futures Trading Strategies: How To Succeed in the Markets

Written By
I. Mitic
Updated
September 23,2022

Many futures trading strategies can be used to succeed in the markets. In this article, we will discuss some of the best ones and explain how they work. We will also provide tips on using them effectively and avoiding common mistakes traders make. So, if you’re interested in learning more about futures trading, keep reading!

The Futures Market Explained

The futures market is a platform for trading contracts for commodities like corn, crude oil, or gold or financial underlying assets such as currencies and interest rates. The price of a futures contract is based on the underlying asset and a trader bets on whether the price will go up or down in the future. 

Futures contracts are bought and sold on exchanges and have standard sizes and expiration dates. When a contract expires, the trader must either take delivery of the underlying commodity or settle their position with cash. Futures trading can be risky, but once you learn some trading futures basics, you’ll see that it can also be very profitable. 

For example, a trader who believes that the current market price of gold will go up in the future can buy a gold futures contract. If the price of gold does rise, the trader will make a profit. However, if the price of gold falls, the trader will lose money. Futures trading is not for everyone, but it can be a way to make money if you know what you’re doing.

The Best Strategies for Futures Traders

Now that we’ve explained how the futures market works, let’s look into some of the best strategies for futures trading.

The Pullback Strategy

The pullback strategy is a common investing technique that involves buying a futures contract after temporary price decreases to take advantage of lower prices.

The key to successful pullback trading is timing; investors must be careful not to buy too early, as they may end up paying more than they would have if they had waited for the price to fall further.

Conversely, they may miss out on the opportunity if they wait too long. The best time to buy is typically when the price starts to rebound from its lows but has not yet recovered fully, and aim for the recent highs as the profit target. This allows investors to buy at a discount and take profits when the price eventually recovers. 

While there is no guaranteed way to perfectly time a pullback trade, understanding how the strategy works can help investors improve their chances of success.

Breakout Trading

Breakout trading is arguably the best future trading strategy. It is used by day traders and short-term traders. The basic idea is to buy when the price of an asset breaks out above resistance levels and to sell when the price breaks out below support levels. This type of trading can be profitable if done correctly, but it can also be risky. 

One of the most significant risks is that the futures price may not continue to move in the desired direction after breaking out of the support and resistance levels. 

The breakout may be false, with the price quickly reversing and heading back into the trading range. False breakouts can also lead to losses if the trader does not use a stop-loss mechanism. Although breakout trading can be a valuable strategy, it is essential to be aware of the risks involved.

Trend Following

Trend following is a bit of an enigma and one of the most advanced futures trading strategies. Some consider it the holy grail of trading strategies. It’s been said that trend following can make you a fortune. Others view it with skepticism and say it doesn’t work. 

So, what is trend following, and does it work? At its core, trend following is a strategy that seeks to profit from market trends. It involves buying assets that are rising in price and selling assets that are falling in price.

The logic behind trend following is that prices tend to move in cycles and that traders can make money by riding the wave of these cycles. Some of the most successful traders use trend following as their primary futures trading strategy. Many hedge funds use variants of trend following as well.

However, trend following is not without its risks. One of the biggest dangers of this strategy is that you can miss out on large portions of a move if you wait for confirmation before entering a trade. 

Long Trading

Long trading is the most basic futures trading strategy. It is simply the act of buying an asset and holding it. The long position can be held for days, weeks, months, or even years. The goal is to sell the asset at a higher price than what was paid, resulting in a profit. 

Many factors, such as economic indicators, political events, and natural disasters, can affect futures prices. As such, long-term trading requires a great deal of research and technical analysis. However, it can be very profitable, making it one of the best futures trading strategies.

At the same time, long trading can also be risky. The price of an asset can go up and down and may never recover. 

This is why long-term traders must be cautious and only invest in assets that they believe will increase in value over time. But, if you’re patient and have the stomach for market volatility, long trading may be right for you.

Short Trading

​​There are multiple trading strategies that the futures market participants can use to take advantage of small price changes, and short trading is one of them. Short trading is an investment strategy that involves selling securities not owned by the trader and replacing them at a later date. The goal of shorting is to profit from a decline in a security’s price. 

Short trading is often used by futures traders who believe that the price of a particular security is overvalued and will soon fall. To short a security, the trader must first borrow the security from another party. The trader then sells the security and hopes to repurchase it at a lower price in the future so that they can return it to the lender and pocket the difference. 

While short trading can be profitable, it also carries a high risk. If the security price rises rather than falls, the trader will incur a loss. Short trading is not for everyone, but it can be a profitable investment strategy for those willing to take on trading risks.

Scalping

Scalping is one of the futures day trading strategies that involves taking small profits frequently. Scalpers aim to make a profit by buying low and selling high or by selling high and buying low. They typically hold their positions for only a few minutes or seconds and exit as soon as they have made a profit.

Most scalpers trade using technical analysis, which means they look for patterns in the price action of a security. They also use stop-loss orders to limit their losses. Although a futures scalping strategy can be very lucrative, it also involves a certain level of risk. That’s why futures traders need to have a solid understanding of the strategies and risk management before attempting to scalp the market.

Scalping is not for everyone, but if you’re the type of futures trader who likes to take quick profits, it may be worth considering.

Swing Trading

Swing trading is a style of trading that attempts to take advantage of short-term price swings rather than the market’s long-term direction. When swing trading, traders typically hold positions from a few days to a few weeks. 

To be successful in futures trading, swing traders need to have a good understanding of both technical and fundamental analysis. They also need to be patient, as success often requires waiting for the right opportunity. 

While this type of trading can be profitable, it can also be riskier than other types of trading. This is because swing traders often hold onto stocks during periods of high market volatility and broad price swings, which can magnify losses if the trade goes against them. As such, swing trading is not for everyone. 

However, for those with the patience and skill to master it, this powerful futures trading strategy can provide an opportunity to generate profits in even the most uncertain markets.

These are just a few of the many futures trading strategies. Each has merits and risks, so it’s important to do your research and choose the one that is right for you. With the right strategy and some luck, you can make a lot of money trading futures. 

Common Mistakes To Avoid in Futures Trading

There are a few common futures trading mistakes that can lead to losses. Here are some to avoid:

  • Not having a clear plan or strategy: Many traders enter the market without a clear plan or strategy, leading to impulsive and often unprofitable decisions. By having a clear idea of where you want to take your trading, you can avoid making costly mistakes. And if you’re unsure how to trade futures, there are plenty of resources to help you begin trading.
  • Not managing risk properly: Risk management is essential in any type of trading, but it is crucial in futures trading due to the high leverage involved. You should always use stop-loss orders to limit your losses and never risk more than you can afford to lose.
  • Focusing on short-term gains: Sometimes traders focus on making quick and easy profits, but this often leads to losses in the long run. And while there are strategies that can produce short-term gains, it’s essential to focus on long-term profitability.
  • Not keeping up with market news and developments: The futures markets are constantly changing, and it’s important to keep up with the latest news and market developments to make informed trading and investment decisions. The best time to trade futures is when the market is trending in a certain direction, so you need to be up-to-date on the latest market news to know when this is happening.
  • Investing in too many markets: It’s important to focus on a few markets you are familiar with and understand well rather than spread yourself too thin by investing in too many markets. You should also be aware of the risks associated with each market you invest in.
  • Putting all eggs in one basket: Many traders make the mistake of investing all their capital in a single trade or market. As much as it is important to focus on just a few markets, it is crucial to diversify your investments to mitigate risk.

These are just some of the mistakes traders make when trading futures. By avoiding them, you will be well on your way to becoming a successful trader.

Bottom Line

The first step in learning how to trade futures is understanding the types of strategies available to you. Each has advantages and disadvantages, so weigh them carefully before you opt for one. With the right strategy and a bit of luck, you can make a lot of money trading futures. 

Just remember to avoid common mistakes, such as over-trading or trading without a plan, and to always use risk management tools such as stop-losses to protect your capital. With a bit of practice, you can become a successful futures trader.

FAQ

Is trading futures profitable?

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While some risks are involved, if you know what you’re doing, futures trading can be a great way to make money. You can use several different strategies to trade futures, and if you learn how to use them effectively, you could see some great results.

Are futures riskier than stocks?

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Many traders believe futures are riskier than stocks. This is because when you trade futures, you are essentially betting on the market’s direction. If the market goes against your position, you can quickly lose a lot of money. 

On the other hand, stocks are more stable and tend to move less violently. Still, if stock trading is your passion, you know it might be just as risky. Ultimately, it all depends on your approach to trading and your risk tolerance.

How do you prevent losses in futures trading?

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A few crucial elements to all futures trading strategies can help you prevent losses and make the most of your trading. First of all, you need to have a solid trading plan. This means you need to know precisely when to enter and exit a trade.

You also need to set strict stop-losses and take-profits. By doing this, you’ll know exactly when to get out of a trade if things go wrong. 

Also, you need to have discipline and not let emotions influence your trading decisions. If you’re feeling emotional, it’s always best to take a break and return later. Finally, you need to diversify your portfolio and ensure you won’t lose everything if the market turns for the worse.

About author

For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.

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