Futures are fundamentally financial contracts that allow parties at both ends to undergo a transaction of an asset at a predetermined date in the future at a pre-specified price. The buyers of a futures contract oblige by the conditions before the contract’s expiry time. The current market price, underlying asset, and expiration date determine the cost of these contracts.
Five futures trading strategies you could use
1. Pullback strategy
The pullback strategy is one of the most effective and powerful futures trading strategies while futures option trading. This strategy is undertaken when trending market conditions and prices decrease or rise above the support or resistance level, respectively. Therefore, when the market is in the uptrend phase, the prices break the resistance level, reverse and finally retest the same level. After the phenomenon has taken place, the trend of changing and getting back to the level is called the broken level.
On the contrary, prices tend to fall below the support price during the downtrend phase and go up to the support price. During this phase, one enters into a short position. Pullback strategies facilitate futures to move in the opposite direction so that traders can book profits.
2. Giving long
In this type of futures trading strategy, one expects future contracts to see a rise in the underlying commodity price. Provided that the accuracy of the price changes and expectation of the market movement is in the right direction, one can leverage the gains in these future contracts by selling them at a higher price.
3. Breakout trading
One of the most effective F&O trading strategies is breakout trading. This strategy is mainly undertaken when a buyer of the futures contract tends to make use of the volatility in the market as during breakouts, the price of the underlying asset tends to move out of the established trading range. Traders generally tend to gain from the market’s direction after breaking either the resistance level or the support level at large.
4. Buyer and seller interest
In this strategy, adequate research is undertaken to decide on the purchase or sale of the futures contract. The Depth of the Market window determines the interest of both parties. This shows the number of orders on the buying and selling sides for a futures contract at different price levels.
5. Spread trading
While futures and options trading, a trader tends to purchase a futures contract, thereby selling another one at a different time, which is said to be spread trading. This strategy focuses on hedging against risks. One gain from this strategy’s unanticipated change between the purchase price and selling price.
Futures trading strategies play a significant role in the market where future option trading is concerned. It is essential to use the most equipped approach based on the needs of the investors and market volatility.