Futures trading means buying and selling contracts. This sounds very simple, but in reality, it is anything but. There is a lot you have to consider, such as fluctuating prices for the assets, and what might cause those fluctuations. There are several different types of futures contracts, from commodities like oil or wheat, or financial, like stocks or currencies.
Futures contracts are generally used by investors to manage risk. They allow you to hedge against price fluctuations in different types of assets. When you enter into a futures contract, you can lock in prices to protect yourself against price movements and market fluctuations. Contracts go through a process known as margin trading. Instead of paying the full price for a contract, you can deposit a certain percentage of the total value. This is called the margin. Having this leverage allows you to control a large position with less capital. However, when the expiry date comes, you will have to make the payment in full.
Here’s how you can develop strategies so that you can find success in futures trading:
Analysis
If you want to make good futures trades, you have to be able to analyze the factors that influence the price of a particular asset. Fundamental analysis will give you insights into supply and demand dynamics, economic indicators, and current events that will have an effect on the price of the asset going forward.
Supply and demand is very important to your analysis. Economics 101 will tell you that the more you have something compared to the demand, the lower the price will be, and vice versa. You must be able to identify factors that will impact the supply and the demand of a product. These include production levels, buying patterns, upcoming consumer needs, and inventories. For example, things like droughts or wars could drastically affect the price of assets in the near future.
You must also identify economic factors such as GDP trends, inflation, employment rates, and interest rates that could influence futures markets. These are indicators of the health of the economy and it might help you predict demand for certain assets.
Current events and geopolitical events can have an incredible impact on futures markets. TRade disputes, natural disasters, and political instability will affect global supplies, disrupt supply chains, and create uncertainty. If you are always informed about geopolitical events, then you will be able to act quickly and take advantage.
Tools and Platforms
We live in a digital world, and trading has followed suit. In recent years there have been many advancements and innovations that have made futures trading easier than ever. Online trading platforms offer real-time data on market prices, economic indicators, and news. These platforms often have charting capabilities as well so that you have a visual representation of pricing trends. They also allow you to make trades quickly so that you always have a chance to take advantage of a situation.
Futures Strategies
Here are some strategies that if you do right, you’ll be able to outperform the market.
1. Breakout Trading
This is the process of identifying key support and resistance levels to enter into a trade at just the right time. When the price breaks, you want in on earlier possible times. Traders will try to anticipate breakouts so that they can jump on an opportunity. If the price breaks below an acceptable level, traders will implement a stop-loss order to manage risk.
2. Range Trading
Range trading is employed when the price of an asset is trading within a well-defined range. Traders identify the upper and lower boundaries of the range and enter long positions near the support level and short positions near the resistance level. Profit targets and stop-loss orders are set within the range.
3. Trend Following
This strategy involves capitalizing on price trends. You can look for assets that have a pattern of moving in a certain direction and then trade based on that direction. You can use technical analysis tools to identify favorable trends, like moving averages and momentum indicators to help with this strategy.
4. Spread Trading
Spread trading is hedging on long and short positions in related futures contracts. The goal with this strategy is the profit from the price difference between the two related contracts. By employing this strategy you can reduce exposure to market fluctuations.
5. Calendar Spread
Calendar spread strategy involves taking opposing positions in futures contracts with different expiration dates but the same underlying asset. Traders predict changes in the price difference between the two contracts over time. This strategy aims to profit from price discrepancies caused by changes in market expectations or supply and demand dynamics.
6. Mean Reversion
The mean reversion strategy assumes that even if they appear volatile, certain assets will return to their mean price. You can identify price movements that seem out of character for a normally stable asset and make trades based on that price overextension.
Bottom Line
Always remembers that no strategy is perfect. While there is no way to guarantee success, you can give yourself a better chance at it. By doing careful analysis and using the tools that are available, you can develop stronger strategies and make smarter futures trades.
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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