The futures market has been around for decades, but only recently have we seen a huge demand for futures trading. The S&P 500 E-mini futures contract was born in 1997 and ever since has become the single most liquid futures contract traded.
After the US Treasury market, the S&P 500 market is the most traded in the world. The liquidity and volume create endless opportunities day in and day out.
How would you like to learn about the 4 popular futures trading strategies for 2020?
1. Trading 2022
This year has been one of the most volatile and exciting that we have seen in quite some time. We ended an 11-year bull market only to experience a 6-month bear market. By definition, a bear market starts when the market drops 20% from highs and we saw the S&P 500 (the economic indicator) fall over 35% between February and May 2020.
The volatility spiked from COVID-19 and an economic shutdown was quickly met with Federal Reserve intervention, stimulus, Quantitative Easing, and more. We saw rates get cut to near 0%. Just as easily we slipped 35% we popped back up to start a new bull market move. Which saw the S&P 500 gain 65% from 2020 lows. Also a 5.5% gain above prior highs.
This was an exciting time in the futures market, presenting traders with massive opportunities across multiple assets. Oil markets saw negative numbers this year as demand dried up thanks to COVID-19. The gold market pushed into a new all-time high through $2,050 per ounce due to risk-off money flows increasing.
There is more movement and volatility to come. This year is a Presidential Election year, we are in the middle of a financial crisis and the potential of COVID-19 returning seems to be increasing. Controlling just 1 futures contract in this market would cost you $400. We advise a little room for error, meaning at least $1,500 in your trading account. Catching small 10-15 point spills in these market conditions yields $500 to $750 return on one contract. The opportunity for those spills has just come back and we will see it into the end of 2020.
Most recently we have seen the “Post Labor Day Effect”, where big money comes back to work after a summer off and rebalances assets. After seeing massive gains in many markets across the board, mainly tech. We have seen the sell off begin as money is flowing out of tech and put into different assets. This could begin another large sell off in September. A month that has cumulatively finished red on average over the past 40 years.
2. Futures Contracts Explained
To understand the following futures trading strategies that are the most popular in 2020, we have to understand what the futures contract is first.
A futures contract is a legal agreement between a buyer and sellers to exchange a commodity, or financial asset at a specific time and price in the future. Contracts are standardized over an exchange. Often the CME. The loss or gain of the futures contract does not take effect until the position is closed out.
We have since evolved the use of the futures contract for speculative reasons, trading it several times throughout the day without having to wait till expiry to take profit or loss. This is enabled by the large volume in the futures contracts that creates liquidity.
Assets like US equities, which include the S&P 500, Nasdaq, Dow Jones, and Russell 2000. Along with international equities are cash-settled. Meaning at the expiry of the contract you either get debited or credited money into your account depending on how the position does. There are others who actually physically deliver like oil and gold. Meaning at the end of the contract, on expiry you will get a certain amount of barrels of oil or bricks of gold delivered to a holding facility. Paying the full price. For the most part, your brokers will close your position before delivery or contact you.
The main futures contracts that are traded throughout the world are:
- The S&P 500 E-mini Futures contract. Worth $50 per point. Moves in tick increments. 1-tick is equal to a quarter-point on the asset. Meaning a move from 3330 to 3330.50 is a 2-tick move or half a point move.
- The Oil futures contract. Worth $10 percent. One-cent movement translates to 1-tick. Meaning a $1.00 move is equal 100-tick move on oil or $1,000 per contract. If oil moves from $40.50 to $40.53 that is a 3-tick move, 3-cent move, or $30 move per contract.
- The Gold futures contract. Worth $10 per 10-cent move. One tick is equal to a 10-cent move. Meaning $1.00 is equal to 10-ticks of movement or worth $100 per contract. If the gold contract moves from $1,920 to $1,920.60 that is a 6-tick movement or $60 movement on one contract.
3. Futures Strategy #1 in 2022
The first trading strategy of 2020 is based on the S&P 500, considering this asset moves the most in the futures market when news comes out and volatility presents itself. It is a no-brainer to have a strategy revolve around the S&P 500. With September among us and the rest of the year looking rather volatile we have a lot of opportunities in the S&P 500 market.
The first strategy is the pullback strategy that takes advantage of the continuation of a trend to the upside or downside. In this case the downside.
To effectively use this strategy we suggest you familiarize yourself with price action and order flow. The process for this strategy goes as follows:
Step 1: Identify the market structure of the market
Step 2: Wait for the level to break & pullback
Step 3: Confirm the level with order flow
Step 4: Execute and Manage the trade
Step 1: Identify the market structure. There are 3 options in this case. The bull trend (higher highs and higher lows), the bear trend (lower highs and lower lows), and the range (equal highs and equal lows).
The bull continues if the prior broken top is held as support, the bear continues if the prior broken low holds as resistance. Looking at the current market trend, we see that the downside is the right side. The market is pointing lower and the lows and highs agree with that sentiment. Although we have seen a slight stall to the downside there is still overall bearish sentiment.
Step 2: In this example, we have seen an overall downtrend in the markets. The purple or pink box indicates the most recent market low. In order for us to continue the downward move, we have to see that low get broken and retest that area for the next leg lower. Which we just saw. From here on the retest, we have to confirm that the level will actually hold resistance and continue to the downside.
Step 3 & 4: In this stage of the process, we want to confirm with order flow. In this case, a chart that we call the footprint. The footprint allows us to see buyers and sellers within the candle. Based on order flow you want to see large market sellers coming into the market and holding out the level with rotations. This ensures that the buyers can’t continue their move to the upside.
We can see that the first red candle (rotation) came in with some market sellers (the red number which is also called a sell imbalance). They highlight large market selling activity. We see two red candles that would help us identify the entries for the shorts. Managing risk and the trade, we would want to have our stops above the prior peaks of the green candles with a target that reflects 2 times the risk taken.
4. Futures Strategy #2 in 2022
The second strategy for futures trading that we recommend traders understand for 2020 is a gold-centered strategy. The gold market moves a lot with news, although less liquid than the S&P 500. It has the potential to have really long swings, especially when Federal reserve intervention is made. This is a breakout strategy on gold and it involves only price action!
Step 1: Understand the market structure
Step 2: Find where the stops are hidden
Step 3: Look for a break of the level (buy/sell stop orders)
Step 4: Manage the position
Step 1: In gold, like any other asset or strategy, we want to identify the market structure of the move and how we may continue that structure. In this case, we can see that there is an upside structure in the market and a bullish price action. We’re breaking highs and holding them on the pullbacks. The next moves are either the blue or the green arrow sequence to continue the move.
Step 2: We want to identify where the stops may be hidden based on the prior tops of this market. In this case above the blue arrow break, you have the first breakout long. The ultimate breakout long is the green arrow sequence. Using the example below. “X” marks the spot, through that top we will see a buy stop run that can run for a while. We know there are stops above that level dues to the price action that created that level. A sharp V-top is created by massive sellers at that level, which means their buy stops are above!
Step 3 & 4: The entry should be above that peak so you can place your stop at an opportune level. The blue arrow indicates the entry you want to use for the buyers. With gold, you will have to use a wider stop because it’s a volatile market. Targeting 2 times or more the stop loss used.
The futures market presents a lot of traders’ opportunities throughout the day. There are many futures trading hours you can choose from to use the following strategies. Typically the best hours to trade the S&P 500 are between 9:00 am and 12:00 pm EST when the big money comes into the market.
There is also an evening window on the S&P 500 futures market between 2:00 am and 5:00 am EST time. The Gold market is best traded throughout the London session and the US market is open. 2:00 am to 4:00 am EST and 8:00 am to 11:00 am EST respectively.
These strategies are amazing for 2020 as they provide insight on different assets and how they like to move based on the volatile market and the news we expect in 2020. Remember, have fun trading futures.
They are very psychological in nature, trading in general is and involves substantial risks. Make sure you are well educated in the futures market before trading, all losses and gains are your responsibility. Manage risk above all else.