Top 5 Futures Trading Strategies to Know in 2023 - 2024
Futures trading lets you guess how prices of things like gold, money, or company shares might change. But it's not always simple and can be risky. That's why it's important to know how the market works and which strategies are best. In this blog, we'll share the top 5 trading methods for 2023 to help you trade better and more safely.
Futures trading lets you set a price now for assets like commodities, currencies, and stocks that you'll buy or sell later. It's a way to guess future prices. While you can make money with futures trading, it's also risky because prices can change unexpectedly. This can be due to reasons like changes in supply and demand or major news events. So, it's important to know the market well and use the right trading strategies to optimise your trading outcomes.
In this blog, we will reveal the top 5 futures trading strategies for 2023 that every trader should know.
What are futures trading strategies?
Traders use futures trading strategies to know when to buy or sell contracts. They combine technical and fundamental analysis to make these strategies. These strategies help reduce risk and increase the chance of making a profit. By following these strategies, traders can avoid making decisions based on emotions or impulses and follow tried and tested trading strategies to ensure consistent returns.
Top 5 futures trading strategies of 2023
There are many different ways to trade futures contracts. Here are some of the top futures trading strategies of 2023.
In this strategy, you buy and sell futures contracts of two correlated assets simultaneously, aiming to profit from the difference, or "spread", between their prices. For instance, if you purchase a futures contract for the NIFTY Bank index, which focuses on the banking sector, at INR 30,000 and simultaneously sell a futures contract for the NIFTY Financial Services index, which covers the broader financial sector, at INR 35,000, you're speculating on the price difference between these two correlated indices. This approach is based on the belief that while both indices might move in the same general direction, there can be short-term disparities in their performances that can be capitalised upon.
In breakout trading, you aim to profit from new price movements in futures. You'll look for specific price points, like resistance or support levels, that a futures contract hasn't crossed before. When the contract price goes beyond these levels, it often indicates a potential continued movement in that direction. For instance, if a futures contract for crude oil you're observing has consistently hovered around INR 4,000 per barrel but suddenly jumps to INR 4,500, it might suggest you an upward trend. Conversely, if a futures contract for cotton you've been tracking, which had been stable at INR 20,000 per bale, drops to INR 19,000, you might anticipate a downward trend.
Going long trading
In futures trading, "going long" refers to buying a futures contract with the expectation that its price will rise by its expiration date. For instance, if you acquire a futures contract for a leading automobile company at INR 500 per share, you're taking a long position, anticipating the stock price will climb by its maturity. This concept isn't limited to stocks; it's relevant to commodities, indices, and currencies. The opposite of this is "going short", where you sell a futures contract expecting its price to decline by the expiration date.
Pullback trading in futures is about entering the market during price dips, anticipating a future rise. Imagine a futures contract for the BANK NIFTY index typically trading at INR 32,000 but momentarily drops to INR 31,000 due to short-term market dynamics. A pullback trader would enter a long position during this dip, predicting a return to its usual value or even higher. This strategy is based on the belief that futures prices don't move linearly but experience periodic retracements (temporary price reversals before continuing in the original direction).
Order flow trading
This method analyses the volume and direction of futures contract orders to gauge overall market sentiment. If, for instance, a futures contract for a telecom company's stock priced at INR 250 per share sees a surge in buy orders, it suggests a strong demand, potentially pushing the stock price upwards. However, if there's a dominance of sell orders, it might hint at an impending price drop. By understanding these order dynamics, futures traders can strategise effectively.
Wrapping up: Key points to remember
- Futures trading strategies guide when to buy and sell contracts.
- In 2023, the top 5 futures strategies are spread trading, breakout trading, going long, pullback, and order flow trading.
- Futures trading offers profit chances but also risks from market swings. Understand your chosen strategy well and regularly adjust your portfolio.
We've made it easy to learn about futures and options trading. Just read our simple guides here.