In the UK, futures traders use a variety of trading strategies to make money. In this article, we’ll look at the most common ones. These include trend-following, swing trading, and breakout trading. Each strategy has its risks and rewards, so it’s essential to understand them before you start trading futures contracts.
If you are interested in looking at the variety of futures you can trade, you can see it here.
What are futures contracts, and why are they used in the UK?
They are agreements to buy or sell an asset at a future date. They’re commonly used in commodities markets but can also be used to trade financial instruments like currencies and bonds. Futures contracts are popular in the UK because they offer traders a way to speculate on the market’s direction without having to put up the total amount of capital for the asset.
It means that traders can take more prominent positions than they would otherwise be able to, allowing them to use leverage. Leverage is when you borrow money to increase your potential profits (or losses). For example, if you have a £10,000 account and are trading with 10:1 leverage, you can control £100,000 worth of contracts.
The five most common futures trading strategies?
Let’s have a look at the most often used futures trading strategies.
Trend-Following
The first and most popular futures trading strategy is trend-following. It involves buying contracts when the market is going up and selling them when it’s down. The goal is to ride the trend until it reverses.
The first is to use technical analysis to identify the trend and trade in that direction. Technical indicators like moving averages, support and resistance levels, and Bollinger Bands can all be used to spot trends.
The second way to trade trends is with fundamental analysis, which involves looking at economic factors that might affect the price of the commodity you’re trading. For example, if you’re trading gold, you’ll want to look at factors like inflation and interest rates.
Swing Trading
The second most common futures trading strategy is swing trading. It involves buying contracts when the market is low and then selling them when their prices rise. The goal is to make minimal profits on each trade that adds up over time.
The first is to use technical analysis to identify support and resistance levels in the market. You can buy contracts when the market is at a support level and sell them when it hits resistance.
The second way to swing trade is with fundamental analysis, which involves looking for economic factors that might cause the price of the commodity to move up or down. For example, if you’re trading oil, you’ll want to look at factors like production levels and geopolitical events.
Breakout Trading
The third most common futures trading strategy is breakout trading, which involves buying contracts when the market breaks out of a range-bound trading pattern.
The first is to use technical analysis to identify range-bound patterns in the market. You can then buy contracts when the market breaks out of that pattern or sell them when it breaks out to the downside.
The second way to trade breakouts is with fundamental analysis, which involves looking for economic factors that might cause the commodity’s price to move outside its usual range. For example, if you’re trading copper, you’ll want to look at factors like industrial demand and supply levels.
Mean Reversion
The fourth most common futures trading strategy is mean reversion. It involves buying contracts when the market is at a low point and selling them when it’s at a high point.
The first is to use technical analysis to identify when the market is overbought or oversold. You can buy contracts when the market is oversold and sell them when it’s overbought.
The second way to trade mean reversion is with fundamental analysis, and this involves looking for economic factors that might cause the commodity’s price to revert to its mean price. For example, if you’re trading wheat, you’ll want to look at factors like production levels and global supply and demand.
Arbitrage
The fifth and final most common futures trading strategy is arbitrage, which involves taking advantage of price differences in different markets.
The first is technical analysis to identify price discrepancies between different markets. You can then buy contracts with a lower price and sell them in the market at a higher price.
The second way to trade arbitrage is with fundamental analysis, which involves looking for economic factors that might cause the commodity’s price to differ between two markets. For example, if you’re trading oil, you’ll want to look at factors like production levels and geopolitical events.