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Types of futures trading strategies to choose
As mentioned earlier, the key to success is not just to select a popular and effective futures trading strategy. The idea is to define the very tactics that will suit your trading style. We have conducted a list with the top 3 tactics that appear to be the most popular with both speculators and hedgers. Please, note that these are not the only ways to make a profit. You are free to opt for another futures trading strategy that you think will bring you to success. You are not obliged to strictly follow the ones below.
1. The Pullback Futures trading strategy
It is one of the most powerful strategies to trade futures contracts. The idea is to execute orders when the price pulls back. For example, you trade on the trending market. At some point, you observe the asset price to below or above the support and resistance level. It means the price level reverses and breaks.
When the retest ends, a trader is supposed to enter the market and follow the uptrend in the same direction with a long position. If the price witnesses the downtrend and hits blow a well-established support level, it is called a pullback. This is where a trader should enter the market and go short.
2. Range Futures trading strategy
If you prefer using the bounce between the important support and resistance levels, you may consider yourself a range trader. The strategy does not work for all trading instruments and assets. As a rule, people use it when trading currencies.
The main concept lies beneath the idea that all traders have feelings and emotions. Their reaction to the breaking or falling market is easy to predict. In other words, when the price drops down lower than a certain price level, market participants are very likely to lose their temper and start considering that level as the resistance.
On the other hand, the price can go even lower to offer better buying conditions for those who were patient enough and waited for the opportunity. Once the price has reached the bottom, range traders make a profit or open a short position to ensure the selling pressure and help the price go high again.
3. Breakout Futures trading strategy
The breakout strategy is another popular approach many futures traders follow. The strategy name makes it clear what kind of concept it applies. The idea is to catch the volatility that takes place once the market has broken out. When we say "break out", we generally mean the asset price breaking through the chart patterns, trend lines, and other levels plotted by various technical indicators.
Those are the three most commonly used futures trading strategies. However, they are not the only ones to benefit from. Traders may alternatively opt for counter-trend trading, buyer and seller interest, trend-following strategies, and some other.
Futures trading strategy beginners should avoid
After we have discussed some of the most popular futures trading strategies, let's have a look at those both beginners and pros should avoid. While effective tactics provide a significant benefit on the market, choosing the wrong path may bring you to failure.
So, futures trading strategies to avoid include:
- Entering markets with high illiquidity – a lack of liquidity results in the market fluctuation. This includes even small orders that can lead to bigger losses than you can expect. The main challenge here is a high volume of buyers and sellers in addition to other participants who are about to jump into the market despite the asset price level.
- Scalping – trading futures is not for scalpers. It will never suit short-term trading strategies, as you will often have to enter the market with a long position. Fast order placement and execution will not work with futures.
- Overnight/Weakened Trading – holding a trade is hardly the best idea with futures, as a trader can miss an important event or be exposed to unfavorable news, which may lead to extra losses.
The bottom line
Choosing a proper futures trading strategy is very important to prevent big losses. With so many different techniques popular among futures traders, you will definitely select the one that meets your particular trading style. Whatever you do, make sure you use risk-management tools. It is recommended to start with the strategy that delivers minimum risk of all. So, getting started with the pullback strategy is a wise decision for beginners.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.