Futures trading involves the speculation of prices in the future for various markets: commodities, including currencies and stocks. It can be very profitable; however, significant risks come with the volatility of market prices. Therefore, understanding how the market functions and which strategy to use is very important in optimising trading results.
In this blog, we will take a look at the five essential futures trading strategies that each trader needs to know. We’ll break down every strategy with practical examples in Indian Rupees so that things become crystal clear.
What are Futures Trading Strategies?
Trading strategies in futures are decision-making activities that the trader adheres to in a conceptually specified manner for buying or selling futures contracts. These strategies combine technical and fundamental analysis so that risks can be minimised and the possibility of profit maximised.
Sticking around with strategies helps traders avoid impulsive decisions and instead depend on tested methods time and again reaping returns.
Top 5 Futures Trading Strategies
There are various futures contract trading methods. The following are the top five futures trading strategies.
1. Spread Trading
Spread trading involves the buying and selling of futures contracts of two related assets simultaneously to take advantage of the spread, or price difference, between them.
Example
Suppose you buy a futures contract on the NIFTY Bank index at ₹30,000 and sell a futures contract on the NIFTY Financial Services index at ₹35,000. So, in a way, you are taking a view of the spread between the prices of two correlated indices. You can profit from this difference if the spread between these indices changes in your favour.
Buy NIFTY Bank futures at: ₹30,000
Sell NIFTY Financial Services futures at: ₹35,000
The spread comes down to: ₹3,000
Profit: (₹35,000 – ₹30,000) – ₹3,000 = ₹2,000
2. Breakout Trading
The underlying idea of breakout trading is to benefit from new developments in the price in the future by identifying certain price points like resistance or support that have not been breached by a futures contract till now.
Example
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Imagine you were following the prices of a crude oil futures contract, which tends to stick around INR 4,000 per barrel. Suddenly, it breaks out and jumps to INR 4,500.
Buy crude oil futures at: ₹4,500
If the price continues increasing to: ₹5,000
Profit: ₹5,000 – ₹4,500 = ₹500 per barrel
Conversely, if a cotton futures contract that was hovering near INR 20,000 per bale falls to INR 19,000:
Sell cotton futures at: ₹19,000
If the price continues to fall to: ₹18,000
Profit: ₹19,000 – ₹18,000 = ₹1,000 per bale
3. Going Long Trading
In futures trading, “going long” is buying a futures contract and expecting its price to increase by the expiration date.
Example:
Say you buy a futures contract of a leading automobile company at INR 500 per share, with the expectation that the stock price would rise.
Buy futures contract at: ₹500 per share
If it rises to: ₹550 per share
Profit: ₹550 – ₹500 = ₹50 per share
The same underlying concept applies to other assets such as commodities, indices, and currencies.
4. Pullback Trading
Pullback trading refers to entering the market when the price dips for a further rise. Example: The BANK NIFTY index can be seen trading at an average price of ₹32,000; however, in this case, it temporarily falls to ₹31,000 due to short-term market dynamics. Buy BANK NIFTY futures at: ₹31,000 When the price bounces back to: ₹32,500 Profit: ₹32,500-31,000 = ₹1,500 per contract.
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The reasoning behind this is simple. Prices of futures do not move in straight lines. There will be retracements in the futures price periodically before the trend resumes directionally.
5. Order Flow Trading
A study about market sentiment is acquired by examining the order volume and direction for the futures contracts.
Example:
A telecom company’s stock, whose depository receipt at $INR 250 a share, is seeing a flood of buy orders for a futures contract in that company’s stock.
Check the order flow: If the number of buy orders suddenly increases, then it could be a sign of strong demand
Buy futures contract at: ₹250 per share
If due to improved demand, the price rises to: INR 270 per share
Profit: ₹270 minus ₹250 = ₹20 per share
On the other hand, if you find the dominance of sell orders, GBK that could give you a cue that the price may fall and so you should sell.
Futures trading strategies tell a trader the time to buy or sell contracts. In the top five futures strategies during 2023-2024 come spread trading, breakout trading, going long, pullback trading, and order flow trading. Of course, one may find opportunities for profit; as with any market, there are risks in trading futures. Understanding your strategy very well and changing your portfolio frequently is necessary.
