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3 Proven Fundamental Futures Trading Strategies

Futures traders use various futures trading strategies in their quest for profits. They can employ these methods to benefit from the rising and falling prices.

Given the huge profit opportunities offered in these markets, some chose to enter the trading world to discover different futures trading techniques.

Learn more about trading commodities on Online Commodity Trading: What You Need to Know.

If you have a firm grasp on the general business behind futures trading, and is ready to learn some methods that you can really use, here are the most basic futures trading strategies to consider when planning your approach to a trade:

fundamental futures trading strategies infographic

  1. Go Long

Going long is the classic method of purchasing futures contracts. It aims to produce profits from a market that you believed will turn bullish over a given period of time.  

Futures contracts can be sold for a higher price to acquire returns, provided that you forecast the direction and timing of the price change correctly.   

However, if the price declines instead of rising, then you are likely to lose money. Your leverage makes profit and loss potential significantly higher than your initial margin investment.

Still, substantial losses are deemed limited. Prices can drop as low as $0 in the event the trade moved against your expectations.

  1. Go Short

You trade short positions if you intend to obtain returns from a bear market. Once the price hits your target level, purchase the shares back to restore what you initially borrowed from your broker.   

You can buy the same futures contract again for a lower cost to profit. The amount of your earnings will depend on the difference between the selling and buying price.

short-futures-tradesMargin requirements for buying and selling futures contract are the same. Daily profits or losses are also credited or debited in the same way. Moreover, your brokerage account reacts in the same way as the going-long strategy when you are trading short positions.

While going short is a vital aspect of active trading, given its ability to let you cash in on both rising and falling markets, keep in mind that you still have to be extra careful.

Note: Before you decide whether you plan on going long or short, the first thing you need to do is to make sure that you have enough money in your account to complete the initial margin requirement for the particular contract.

Read also the Important Steps to Build and Develop the Best Investment Plan to know more about creating a successful investment plan for a portfolio. 

  1. Spread Trading

Long or short trades involve buying or selling futures contracts to profit from a projected bull or bear market. While many futures transactions involve either of the two, spread trading is another widely-used method as well.          

Spreads receive returns from the price difference between the selling and buying of two different contracts.  It is a strategy that combines a long and short trade.

If gold prices for instance, go up, the rise on the long position will be able to offset losses on the short position, and the opposite would happen if gold prices decline.

Overall, spreads are seen to have smaller risk. Spread trading allows you to assume potential risks of the difference between two futures contracts, instead of just one contract.

Spread trading involves trading a combination of two separate futures contracts. Here are some of the most commonly used types of spreads:

  • Calendar Spreads

You utilize a calendar spread when you want to gain from the course of time and / or further develop implied volatility in a directionally balanced technique.

This type of spread is created by simultaneously buying and selling two contracts of the same kind and price, but with different delivery months.

Selling futures with an approaching expiration date, and buying futures with a longer-term expiration at the same time is the usual process involved in a calendar spread trading. 

  • Intermarket Spreads

Also called as inter-commodity spread, an intermarket spread is established by simultaneously taking a long position in one market and a short position of the same expiry date in another market.

The risk of this spread, however, is that both futures contracts will move in the direction contrary to your expectations. Margin requirements are also usually lower because of the more risk adverse nature of an intermarket spread.

  • Inter-Exchange Spreads

These are any type of spread in which each outright leg is listed on separate exchanges. The strategy behind this spread is to acquire returns from the weakening or strengthening price difference of futures contracts. 

By buying and selling two contracts on different exchanges with the same expiration date at the same time, you are going along with the relationship between exchanges without needing to put your attention on market direction.

For example, you may purchase the front leg on the Chicago Board of Trade (CBOT) and sell the back leg on the New York Mercantile Exchange (NYMEX).

Conclusion

Futures trading strategies are rooted in speculative investing. Traders speculate on whether the market will be bullish or bearish. This will then determine the chance of investors profiting from such transaction. They may choose to go long or go short, or use spreads to obtain returns from rising and falling prices.

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