Here we will cover futures trading strategies for all types of traders. You’ll get the chance to learn a futures strategy and we’ll also reveal the best practices of the futures market. The best strategy for futures trading can be a potential home run in the hands of a disciplined trader.
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The savviest hedge funds managers and top traders in the world trade futures. This has inspired many traders to engage in the most thrilling markets in the world. This guide besides explaining to you the principles and the futures strategy, it will also help you decide if the futures market is right for you.
Down through this futures market guide, we’re going to reveal our favorite NIFTY futures trading strategy. We’re going to lay down all the trading rules so you can become a savvy futures trader too.
Moving forward, we’re starting this guide with an explanation of trading futures for dummies.
How Does Futures Trading Work?
Futures are financial derivatives contracts that obligate the buyer/seller of the contract to purchase/sell an asset at a specified price and a pre-determined date in the future. The future market was first created to serve the needs of commercial traders.
And, that’s the reason why the underlying asset that you buy and sell on futures is a physical commodity in most cases. However, there are also future contracts on financial instruments such as bonds or equity indices.
Read our beginner’s guide to derivatives here: Introduction to Derivatives Trading – Guide to Financial Derivatives.
Where is futures trading conducted?
Futures trading is done through the CME. This means the futures contract are centralized and regulated, offering more price efficiency.
Different futures products have their own contract specifications. For example, the Emini S&P 500, ticker symbol ES as listed on the CME, provides the most efficient and liquid ways to have an exposure to the S&P 500 Index.
The E-mini contract specs can be seen in the figure above and summarized below:
- Emini S&P 500 futures contract trades Sunday through Friday from 6:00 PM to 5:00 PM ET with daily trading halts from 4:15 PM to 4:30 PM.
- A single ES contract has a value of $50 x S&P 500 Index.
- Emini futures trades in increments point of 0.25.
- The dollar value of one tick is $12.50
- The Emini futures contract expires every quarter.
Once you know the basics you can now develop your own Emini trading strategy. Now, if you want to trade a specific commodity like corn, you got to know its contract specs to develop your corn futures trading strategy.
Learn how to implement successful strategies for commodity trading amid the ongoing US-China trade war.
Let’s now explore some of the advantages of futures trading.
Why use the Futures Strategy?
The leverage available in futures and the low margin requirements is the reason why the futures strategy is so popular among professional traders. This means that the potential profits can be substantially higher.
The low commission or fee is another advantage of futures trading.
Nowadays, the majority of futures markets can be traded electronically around the clock, reducing the overnight gap risk for stock index futures.
Also, check out the advantages of futures over options: Options vs. Futures Advantages – How to maximize your profits.
In the USA, futures trading have the advantage of a favorable tax treatment known as the 60/40 rule. The tax treatment 60/40 means that 60% of the profits are taxed at the long-term capital gains rate and 40% of profits are taxed at short-term capital gains rate.
This is a big saving for the US-based traders.
Unlike stock traders which, according to the FINRA ho requires to keep a minimum trade balance of $25,000 on any day if you day trade four or more times in five business days; futures traders can open accounts with much less money. A futures trader only needs to have enough capital required to put as margin collateral for one futures contract.
We have a few tips on how to avoid the PDT rule here: Day Trading Rules Under 25k - Know the Rules of the Game.
The futures market comes with many other advantages, these being just a few highlights.
Now, let’s see what is the best strategy for futures trading?
What is the Best Strategy for Futures Trading?
In this section, you’ll get information about futures trading strategies that work so you can take advantage of the opportunities in the futures market. The best approach to trading futures is day trading. As a disclaimer, you need to be aware if you’re going to day trade futures because it’s a risky business.
However, fortunes have been made day trading futures. One of the most successful futures day traders, Paul Rotter has made an estimated profit of $65-78 million per year for 10 years trading Bund futures. That made him the largest trader of German debt futures.
Learn how to day trade online with our day trading for dummies guide. You’ll learn 6 trading secrets every beginner should know.
So, how futures day trading works?
Futures prices on a daily basis tend to exhibit a certain trading pattern. To really understand what we mean by this, let’s imagine an example.
The traffic density and flow are not evenly distributed throughout the day. Usually, in the mornings, there is bigger traffic flow as people get to work and then in the afternoon, the traffic slows down. But by the end of the day, the traffic flow also gets busy.
That’s exactly how the futures market work throughout the trading day.
Futures tend to experience the same time of behavior:
- A lot of volatility at the opening of the trading session.
- No volatility in the middle of the trading session.
- And the volatility picks up again before the closing trading session.
Having this information available to use in your toolbox will enable you to develop profitable futures trading strategies.
For example, early in the morning, you can catch some nice intraday trend trades or breakout trades. That’s the sweet spot of the futures market. However, before the closing price, the futures market tends to experience intraday market reversals.
As a short-term trader, you need intraday volatility to be able to extract some profits out of the market. However, you can’t make money day trading futures because some days are much better to have volatility than others. In order to distinguish between the prices discrepancies, we have developed a free futures day trading strategy.
Here is a specific futures day trading setup that is easy to implement.
This futures strategy is a combination of volatility trading and breakout trading. The concept behind this day trading strategy is that futures tend to exhibit price movements of a certain size on an intraday level.
Usually, this futures trading system will generate 1 signal per day. The rules of this system are based on the previous trading day high and low prices. Simply multiply the high/low prices by 0.25 and add the opening price of the high and subtract the opening price of the low.
This will result in trading breakout range.
Buy futures contracts if we break above this breakout range and sell futures contracts if we break below the breakout range. The default target is measured by simply adding the trading range to the opening price, while the protective stop loss is placed on the opposite side of the trading range.
If you’re not a futures day trader we’ve got your back covered too.
Next, we’re going to give you a competitive edge to learn a swing trading strategy for the futures market.
Futures Swing Trading Strategies
In order for your swing trading strategies to be workable, it must give you an edge. Swing trading futures is the only multisession system on our futures trading toolbox. While swing trading stock and forex are more popular, futures are also suitable for swing trading. You need to be aware that the margin requirements are higher when attempting to swing trade futures. This is due to the overnight gap risk.
So, how much money do you need to swing trade futures?
The margin requirements really depend on the futures contract traded and sometimes on your futures broker. You need to have enough capital to cover the initial margin requirements to swing trade futures. Around $10k to $20k starting capital should be enough.
Futures swing trading is more suitable during strong trading markets as it gives the trader the opportunity to ride the trends. So, with swing trading, it’s important to have the right time-frame selection if you want to succeed.
Learn how to identify the right swing to boost your profit: Swing Trading Strategies that Work.
Now for the real thing, we’re going to reveal the most profitable trading pattern to trade the NIFTY, the National Stock Exchange of India's benchmark broad-based stock market.
NIFTY Futures Trading Strategy
The NIFTY futures trading strategy is a technical-based strategy. We use the best combination of indicators that can generate accurate trading signals. This futures trading strategy will let you capture the intraday NIFTY trend.
We don’t reveal anything new here. Actually, this day trading futures strategy was developed by prominent trader Linda Raschke. However, through extensive research, we’ve found out that the NIFTY futures contract tends to generate more accurate trading signals.
This strategy is known to the general public as the Holy Grail.
Let’s now reveal the tools needed to successfully trade the futures market.
The Holy Grail trading setup requires using a combination of two indicators:
- ADX (Average Directional Index) using the default 14-period.
- SMA (Simple Moving Average) using a 20-period setting.
The rules trading the NIFTY market will help you find entry points after a pullback so you can ride the trend. The ADX indicator will help us measure the strength of the trend. On the other hand, the moving average will help us determine where the retracement might end.
The NIFTY futures trading strategy will offer you a very low-risk entry point.
Here are the rules for buying NIFTY futures contract:
- The ADX needs to break above 30 and continue rising.
- The NIFTY price also needs to trade above the 20-period MA.
- Wait for a retracement in the NIFTY price to the 20-period moving average.
- Place a buy stop order above the high of the candle that touched the 20-period MA.
- Once your order is filled, place your protective stop loss below the 20-period MA
- Exit and take profit when NIFTY breaks and close below the 20-period MA.
Our futures trading system was slightly modified than the original strategy. By adjusting the strategy, we managed to improve the overall performance and obtain a better edge.
Final Words – Futures Strategy
Futures are a remarkable trading vehicle that allows traders to trade a variety of instruments. Regardless of the futures trading strategies you use, make sure you know them so deeply that you can execute it without hesitation. The markets are constantly changing so regardless how good of a trader you are, there’s always a new trading trick that can help optimize your trading performance.
The bottom line is that you can perfect your trading skills by sticking to only one futures strategy and trying to master it. By following these simple trading principles, you have a better chance of making more profits in the futures market.
Do not forget to follow our NIFTY futures trading strategy if you want a methodical approach to day trade futures. Want to learn how to scalp futures? Be sure to check out the best Simple Scalping Strategy Guide.
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