In the public market, futures trading is one of the most advanced and sophisticated areas. Because the gains investors receive are huge. It is exciting and vast trading. It enables investors to trade on the right from cotton to energies.
Hence, investors are not restricted to one sector of the global economy. Day trading futures are highly volatile because here, investors are requested to buy/sell futures contracts on the same day. This means all the positions get closed within the day, no contracts open overnight.
If you are seeking a highly leveraged investment, then you should opt for future trading. But, trading in futures contracts is not as simple as you are thinking. Only the best futures trading strategies will help you to earn profits.
Futures Trading Strategies
Many experienced traders invest in the day trading futures and earn decent profits. Experienced traders don’t walk alone. They take the decision based on both fundamental and technical analysis.
In this blog, we are going to tell you effective futures trading strategies that make your investment game stronger and offset the risk of losing money.
List of Best Strategies for Futures Trading
Below are the best futures trading strategies, from the basic to the more complex by market research.
1. The pullback strategy
2. Going long
3. Going short
4. Bull calendar spread
5. Bear calendar spread
1. The Pullback Strategy
It is one of the most effective and efficient futures spread trading strategies. A pullback is a price movement that works against the trend. There is a resistance level where the price movements go above and below. During the uptrend, when the price goes above the established resistance level, it reverses the resistance level. During a downtrend, when the price goes below the resistance level, reverses to the support level. In the event, if a trader misses out on the initial price move, he can wait for the price to get back to the resistance level.
Benefits of Pullback Strategy
Some of them are as follows:
- Trading pullback lets you have a tighter stop loss as your trade location is good, giving you a better risk to reward.
- From a psychological viewpoint, it’s simpler to pull the trigger as you’re buying high and selling low.
Example of Pullback Strategy: a stock may experience a significant rise following a positive earnings announcement and then experience a pullback as traders with existing positions take the profit off the table. The positive earnings, but, are a fundamental signal that implies that the stock will resume its uptrend.
2. Going Long
It is one of the basic calendar spread futures trading strategies. Investors need to buy future contracts expecting to rise in price by expiration. You can buy the future contrasts if you are expecting the price is about to increase. If you predict the market prices and timing accurately, you can sell the futures contracts at higher prices. But, if your forecast gets wrong, you will face loss in the market.
Benefits of Going Long
- Locks in a price
- Limits losses
- Dovetails with historic market performance
Best to use when: The futures arrangement gives a leveraged return on the underlying asset’s rise, so the trader expects a clear move higher soon. Buying a futures deal is the most straightforward futures trading strategy for speculating on an asset rising before the contract expires.
Example of going long: Maize futures trade at $3.50, and you choose to buy five contracts of the commodity, each containing 5,000 bushels. Your broker provides you to have an initial margin of $800 on each contract and $700 in maintenance margin. Total cost is $87,500 (5 * $3.50 * 5,000), but you’ll need only $4,000 in equity to open the position and $3,500 in maintenance margin.
| Futures price | Long position’s profit |
| $3.80 | $7,500 |
| $3.70 | $5,000 |
| $3.60 | $2,500 |
| $3.50 | $0 |
| $3.40 | -$2,500 |
| $3.30 | -$5,000 |
Risks and rewards: Going long allows the inherent promise of the futures deal, a leveraged return on the underlying asset’s rise. This has an untapped upside as long as the asset grows, making this futures trading strategy a potential home run. In this instance, if the contract raises 10 cents to $3.60 (a profit of 2.8%), then your equity stake balloons from $4,000 to $6,500 for a return of nearly 63%. That is, the five contracts are now worth $90,000, and the added $2,500 is your gain.
Going long also exposes you to the leveraged downside. If the underlying asset declines in value, it hits the long futures contract just as difficult, and the investor might have to put up more money to hold the position. If the contract fails by 10 cents to $3.40 (a loss of 2.8%), then the equity stake drops from $4,000 to $1,500 for a drop of nearly 63%. With a supporting margin of $3,500, the broker will immediately ask you to deposit money to bring the account back to the initial margin level.
3. Going Short
Going short is one of the simplest day trading future strategies. By using this strategy, you can sell future contrast expecting them to fall by expiration if you go for short contract full leveraged returns of an asset that is expected to fall.
Benefits of Going Short
- A short position refers to a trading technique in which an investor sells security with plans to buy it later.
- Short-sellers borrow can shares of stock from an investment bank or other financial institution, paying a fee to borrow the shares while the short position is in place.
Best to use when: Selling a futures contract is another straightforward futures trading strategy, but it can be riskier than going long because of the potential for uncapped failures if the underlying asset continues to rise. Investors going short a deal want the full leveraged returns of an asset that is supposed to befall.
Example of going short: Maize futures trade at $3.50, and you decide to sell five contracts, each containing 5,000 bushels. Your broker provides you to have an initial margin of $800 on each contract and $700 in support margin. In total, the contracts are worth $87,500 (5* $3.50 * 5,000), but you’ll want only $4,000 in equity to open the position and $3,500 in support margin.
| Futures price | Short position’s profit |
| $3.80 | -$7,500 |
| $3.70 | -$5,000 |
| $3.60 | -$2,500 |
| $3.50 | $0 |
| $3.40 | $2,500 |
| $3.30 | $5,000 |
Risks and rewards: Going short gives several of the same advantages that going long does, most notably the leveraged return on the underlying asset’s decline. But, unlike the long view, going short has an uncapped downside. In this instance, if the contract rises 10 cents to $3.60 (a gain of 2.8%), then your equity stake drops from $4,000 to $1,500 for a loss of nearly 63%. That is, the 5 contracts are now worth $90,000, and the $2,500 drop is your loss. Because the account no longer satisfies the maintenance margin, your broker will issue a margin call, and you’ll need to deposit $2,500 to bring the account back to the initial margin level.
Going short shows you the leveraged upside when the underlying asset declines. If the contract declines 10 cents to $3.40 (a drop of 2.8%), then your equity soars from $4,000 to $6,500 for a return of nearly 63%. That is, the 5 contracts are worth $85,000, and the incremental $2,500 is your profit. Although your upside is capped since the underlying asset cannot fall below $0. In other words, you could make on the short contract is the total value of the short position, which is $87,500 in this instance.
4. Bull Calendar Spread
The bull calendar spread futures trading is used when the investors buy/sell futures contracts on the same day but with different expiration. When choosing the bull calendar spread futures strategy, traders go along the short-term contract and short the long-term contract. The significant benefits of using this future spread trading strategy are it reduces the risk of losing money by eliminating the key driver contract value.
Benefits of Bull Calendar Spread
- Low Margin
- Low Volatility
- More Skill than Speculation
Best to use when: The trader must expect the long contract to move up relatively more than the short contract, extending the value of the extent and creating a profit for the trader. A bull calendar extent is a more conservative position that is less volatile than going long. It also needs fewer margins to set up than a one-leg futures position, and this is an important advantage of the trade. Plus, this lower margin provides the trader to achieve a higher return on capital.
Example of a bull calendar spread: Expecting Maize to grow over the next few months, you buy 5 September contracts with 5,000 bushels each for $3.50 and sell five December contracts for $3.55. The trade needs an initial margin of $500 and a maintenance margin of $450 per spread. With 5 extents, you need an initial margin of $2,500 and a maintenance margin of $2,250.
| Net spread (December – September) | Bull calendar spread’s profit |
| $0.15 | $2,500 |
| $0.10 | $1,250 |
| $0.05 | $0 |
| $0 | -$1,250 |
| -$0.05 | -$2,500 |
| -$0.10 | -$3,750 |
Risks and rewards: The appeal of the bull calendar spread is that you can still get engaging returns on a conservative strategy with a lower margin. That reduced margin helps juice your percentage return.
In this instance, the trader earns a nice return on a small widening of the extent. From a starting extent of $0.05, the spread requires to extend just $0.10 (about 3% on a $3.50 price) for the trader to earn $2,500 in profit. With an initial margin of just $2,500, the trade returns a 100% gain on a small change in the extent of pricing. That’s the appeal of the bull calendar spread.
Of course, if the extent moves $0.10 in the other direction, it will harm the trade as much as the positive move helped it. If the trade narrows beyond the initial $0.05 spread, the trader starts to lose money. And if that 3% move does happen, the trader will have to increase equity fast- a full $2,500 to maintain the position.
5. Bear Calendar Spread
It is the same as the bull calendar spread, where the traders buy/sell the contracts on the same underlying assets but with different expirations. This strategy the risk of losing money by eliminating the key driver contract value.
Benefits of Bear Calendar Spread
- Much more avenues of gain than an outright futures position, therefore a higher probability of gain.
- Futures Spread prices are directed to seasonality and move within pre-determinable limits, making it simpler to find good entry points.
- Bear Spreads are proficient in profiting even when the underlying asset remains idle.
Best to use when: The trader must assume the short contract to increase almost more than the long contract, widening the value of the spread and creating a profit. A bear calendar spread is a more conservative position that is less volatile, requiring less margin to set up than a one-leg futures position, and this is a vital advantage of the spread trade. This lower margin necessary provides the trader to achieve a higher return on capital.
Example of a bear calendar spread: Expecting Maize to fall over the next few months, you sell five September contracts with 5,000 bushels each for $3.50 and buy five December contracts for $3.55. The trade needs an initial margin of $500 and a maintenance margin of $450 per extent. With 5 spreads, you require an initial margin of $2,500 and a maintenance margin of $2,250.
| Net spread (December – September) | Bear calendar spread’s profit |
| $0.15 | -$2,500 |
| $0.10 | -$1,250 |
| $0.05 | $0 |
| $0 | $1,250 |
| -$0.05 | $2,500 |
| -$0.10 | $3,750 |
Risks and rewards: The appeal of the bear calendar spread is that you can make nice returns on a conservative strategy while the broker needs a lower margin. This decreased margin helps boost your percentage return on a successful trade.
In this instance, the trader makes a nice return on a small move of the spread. From a starting spread of $0.05, the spread requires to drop just $0.10 (about 3% on a $3.50 contract) for the trader to earn $2,500 in profit. With an initial margin of just $2,500, the trade returns a 100% gain on a small change in the spread. That’s why traders like the bear calendar spread.
Of course, if the spread runs $0.10 in the other direction, the return will be hit as much as the positive move encouraged it. If the spread grows beyond the initial $0.05 spread, the trader starts to lose money. If that 3% move does happen, the trader will have to increase equity fast — a full $2,500 to maintain the position.
Read More: Trading vs. Investing: Difference Between Stock Trading & Investment
Futures Trading Strategies to Avoid
Needless to say, effective and efficient future trading strategies help investors get high returns from the investment. But, not strategies are good. Some of them come with outdated facts and figures that you should avoid.
1. Trading a Highly Illiquid Market
An investor can find liquidity by calculating the numbers of buyers and sellers at each price level. Blue-chip companies like Apple, Samsung, and Starbucks have large numbers of buyers and sellers. However, they reduce the volatility of the securities but are associated with large trading risks. So, illiquid financial instruments can fluctuate and rapidly lead to losses.
2. Scalping Strategies
Scalping is the outdated trading strategy that executes to take the benefits of the short-term price movements. This strategy easily attracts novice traders. However, if they choose this strategy, they will face a huge loss. Only an experienced trader can consistently take the profit from the scalping strategy. Novice traders need to train on long-term trading styles then switch to scalping strategy.
3. Holding Trades Overnight/Weekend
Whenever you decide to hold the assets overnight or weekend, unfortunately, the only loss comes into your hands. This is true if you hold the trades for more than 3 days.
Bottom Line
Future trading is diverse trading that allows investors to invest in stocks, bonds, indexes, currencies, commodities, and other contracts to achieve huge gains.
Whether you are a beginner or an experienced investor, following the best futures trading strategies, always offsets the risk of losing money and helps you in accomplishing trading goals.
