Futures Trading Strategy
Futures Trading Strategy. Futures trading strategies that have historically generated the highest returns with minimal risk.
Futures Trading Strategy: Trendline Trading
As Bernstein notes, here are the most important rules to trendline trading:
Trade with the trend
This cardinal rule is commonly overlooked by the novice investor. Always learn to recognize the larger market trends and pay less attention to the ‘noise’ in the daily fluctuations. Markets tend to move in the direction of the trend over time, so attempting to trade against the trend would be almost suicidal.
Place stop losses below the trendline
Thus, as soon as the market closes below the trendline, you should liquidate your long position. Breaking the trendline would indicate that the trendline no longer functions as a support; a breakout could lead to rapid price movements further downwards.
Take profits when the market approaches the resistance line
When you are in a long position, you should aim to take profits when the market approaches or touches the resistance line. Another method would be to take profits once you notice a new trendline signal being formed.
Strategy for Futures Trading: Cycle Trading
In order to trade cycles effectively, you need to abide by the following rules, as suggested by Bernstein:
Find a market that has reliable cycles
Reliable cycles in stock index futures include the 20 to 23 week cycles and the 14 day cycle. As for grain and livestock markets, the 9 to 11 month cycle would be a good guide; and for the silver and gold markets, the 28-day cycle. Interest rate futures follow an approximately 32-day cycle.
Do not trade markets that are highly correlated
This would expose you to even higher risk than necessary, as both markets would tend to move in the same direction. Should your prediction go wrong, you would take losses on both fronts. Markets that tend the follow similar basic cycles should thus be avoided.
Strategy for Futures Trading: Moving Averages
Moving Averages are simple mathematical manipulations that providing a moving indication of market activity. A 14-day moving average takes the average of market prices over the past 14 days, while a 30-day moving average takes the average of market prices over the past 30 days. This value is calculated at the close of each day, and a graph would then be plotted to join all the data points representing each day – thereby forming the moving average graphs.
In order to trade moving averages successfully, you need to trade only the breakouts. If the market breaks above the moving average, that is usually a bullish signal. And if the market breaks below the moving average, that is usually a bearish signal. Trading at any other time can be dangerous, as you would not be able to accurately gauge whether the trend is about to reverse. Remember: moving averages lag actual price movements!
Advantages of Moving Averages
Moving Averages are thus an excellent way to objectively determine if you are in a bullish or bearish market, and helps you follow the trend efficiently.
Disadvantages of Moving Averages
Poor indicator in range or sideway markets – Moving averages are poor indicators when the market is ranging or moving sideways. When that happens, the market price tends to go above and below the moving average continuously, making it difficult to trade according to the moving average.
Too many signals – A moving average based trading system will thus tend to generate too many signals, causing you to be stopped out too often, leading to high commission fees.
Futures Trading Strategy
More on how to trade futures (high probability success with seasonal trading).