Many people are interested in futures trading, but the jargon and complexity often deter them. It is common to see that many people join online forums or watch videos on how to start trading, but this may not be the best approach to succeed in this market. With so much information available, it is crucial to understand what makes for successful trading strategies before one starts with futures trading.
Traders have successfully employed several strategies over the years. These strategies range from simple trend following methods to complex algorithmic computerised models using machine learning techniques. Deciding on a particular strategy depends on personal preference and other elements such as capital availability, risk appetite and time commitment levels required by the trader.
Market making strategy
This is one of the most straightforward strategies to employ while trading in futures markets. The idea is to watch the market prices and spot any price discrepancy. Once a gap is spotted, one can place an order at the price that existed had there not been a gap. It will ensure that you can buy or sell at almost no loss or gain if successful in your trade. Market making involves buying at low and selling at high for small gains over long periods, i.e., scalping.
When employing this strategy, a day trader’s main aim is to base their trades on small gains within small margins with relatively short holding periods, i.e., seconds, minutes, hours, or days. A trader employing this strategy typically bases their trades on daily, weekly or monthly charts to make quick gains. It is a very high risk/strong reward strategy with losses also being of similar magnitudes if it does not work out.
This involves exiting the market when there are more buy orders than sell orders and vice versa—making an entry into the market when contrarians are negative means that one will be buying low when others are ready to sell at that price. It is an effective strategy for traders who have good timing skills. They will sit out all bull markets waiting for a retracement before entering into shorts when everyone else seems optimistic about it despite clear signals of a market reversal. You can look at the Saxo markets to practise this strategy.
Scalp and trend strategy
This strategy involves pairing the previous two strategies, i.e., scalping and contrarian, together to make one effective trading strategy. Scalping helps take profits from short-term trends, whilst using contrarians help limit losses from any significant reversals that might happen in your trades under this strategy.
Price breakout or range breakout strategy
Analysing price action involves looking at historical data on charts to look for patterns that you can use to decide whether there will be a continuation of the current trend, reversal or consolidation of prices within a specific range. It entails identifying a pivotal point where resistance breaks above an equilibrium price, creating a new high followed by a pullback to test the new resistance level. When this happens, it indicates a price breakout, and an uptrend might happen in the future.
Conversely, there may be instances where the price falls below a certain critical point known as support. This creates a new low, which is followed by a pullback to test the previous low, creating a lower low to indicate that prices might continue dropping in the future.
Hull and span strategy
The hull and span strategy involves setting up two orders: buying and selling at different locations around equilibrium prices (i.e., resistance and support levels). The purpose here is to make trades possible even when one order gets filled before you place your next order, given that you have a particular timeframe for your trades.
Price divergence or spread breakout strategy
To spot this type of price action, one requires knowledge of the price action candlesticks patterns. In particular, it identifies a bullish divergence pattern when selling pressure increases but prices move up. It also identifies an inverted bearish divergence pattern where selling pressures abate, but prices fall instead of rising. The trend is likely to change once these two conditions have occurred. Hence the trader has a high probability of being right in predicting a reversal in a trend direction.