Futures are an acknowledged trading vehicle that derives its price from the fundamental financial instrument.
Suppose you would like to urge your feet wet with futures contracts and become a successful futures trader. In that case, you’ll get to have a well-defined trading strategy that helps you retain your risk beneath the resistor and avoid emotional trading.
#1 The Pullback Strategy
The pullback strategy may be a dominant futures trading strategy that’s supported price pullbacks. A pullback befalls during trending markets when the worth breaks above or below a support/resistance level, reverses and retests that broken level again.
During uptrends, the worth breaks above a fixed resistance level reverse and retests the resistance level. Once the retest is complete, a trader would enter with an extended position within the direction of the underlying uptrend.
During downtrends, the worth breaks below a well-established price reverse and retests the price again. This is a pullback, and a trader would enter with a temporary position within the direction of the underlying downtrend.
#2 Trading the Range
Most market contributors are still humans who have emotions and memories. When the market has difficulties interrupting a particular price index, market participants will ask that level as a resistance level. When the worth reaches an equivalent level again, some traders will start to require profits et al. will open short positions within the market, increasing selling pressure on the financial instrument and certainly sending the worth down.
On the opposite hand, when the worth has difficulties interrupting below a particular level and reaches that same level again, market participants who are already shorting the market might start enchanting returns. In contrast, others will start buying at those lower prices, which can increase buying pressure on the financial instrument and certainly send the worth up. Those levels are mentioned as support levels.
#3 Breakout Trading
One of the most popular tactics in day trading, breakout trading, has a massive following among futures traders. As its name suggests, breakout trading aims to catch the market volatility when the worth is breaking out of chart patterns, channels, trendlines, horizontal S/R levels, and other technical levels.
Popular chart designs for trading breakouts include:
- The top and shoulders pattern (trading the neckline breakout).
- Pennant and triangle patterns always signal a continuation of the underlying trend.
- Double tops and bottoms.
Just afterward, a breakout occurs, the market usually involvements increased volatility as numerous pending orders become implemented. Breakout traders attempt to cash in on that volatility rise by taking positions within the breakout direction.
#4 Fundamental Trading Strategy
While maximum of the futures trading strategies explained in this article is technical, you need to be aware that most high-volatility price moves are a by-product of changes in the underlying instrument’s fundamentals. Fundamentals pledge and reverse trends and break necessary support and resistance levels.
Professional futures traders need to be up-to-date on essential developments of the traded financial instrument. Critical traders base 80% of their trading decisions on fundamentals and 20% on technical as a rule of thumb.
#5 Buyer and Seller Interest
Traders utilize buyer and seller interest to decide whether to shop for or sell a derivative instrument. Buyer and seller interest is decided by the Depth of Market (DoM) window, which shows the amount of open buy and sell orders for a derivative instrument at several price levels.
The Depth of Market shows the liquidity for the original sanctuary – a better number of market orders at each price means higher liquidity, and the other way around.
Some brokers ask the Depth of Market because of the Order Book because it shows the number of pending orders for the underlying security or currency. These lists are updated in real-time to reflect the current trading activity within the market.
Large trading orders won’t affect the worth of highly liquid security, like Amazon, to an outsized extent. However, if the depth of the market and liquidity is low, even small trading orders can significantly impact the worth.