10 Best Futures Trading Strategies in 2022

Get ready to have in-depth information about future trading strategies! Of course, many commodities can be traded on futures markets, from cotton to corn to crude oil. Yet these derivatives offer more than that. 

Futures traders' portfolios are relatively safe in periods of solid economic movement because they are not tied to one financial sector. However, traders can also suffer losses due to the broad price swings in futures. 

Trading futures is like gambling away your money with no strategy in place. You will completely lose money if you don't have a well-considered strategy when trading futures.

You will gain an advantage regardless of the market or futures you trade by learning tried-and-true strategies in addition to using technical analysis to analyze the potential movement of the price. 

To help you increase your odds of trading success, we've laid out 10 of the best futures trading strategies.

Futures - what is it all about?

In a futures contract, two persons - a buyer and a seller - agree to transact, that is, purchase and deliver an asset for a specified price on a specific date. Unlike options, these contracts do not require the buyer or seller to transact with the other party.

Trading futures requires you to comply with the contract terms when it expires. Contracts are not affected by the contract's current market price's underlying asset price. Instead, futures contracts are priced according to the underlying asset's price. 

A futures contract's price is also determined by its expiration date. In addition to gold, crude oil, natural gas, and financial instruments such as stocks and currencies, futures are often based on these assets.

Additionally, futures contracts are always standardized, so the quantity of the asset purchased or sold is always included in the contract. You will always trade GBP 62,500 when you trade contracts on British Pounds.

There is always a 1,000 barrel contract for crude oil and a 5,000-bushel agreement for corn.

Futures: How do they work?

Hedging and speculating can both be done with futures contracts. Protection against loss is the objective of hedging. For example, a farmer growing coffee might want to protect himself from a price decline in the future. 

In a futures contract, the farmer receives an agreed payment and the date he must deliver the coffee, regardless of whether the price of coffee falls in the future.

Futures are primarily used for speculation, however. The price of an asset can fall or rise, and a trader can profit by leveraging that. 

Since traders don't want to take possession of the goods, they seldom hold a contract until expiration. Instead, they sell contracts that make them money before the expiration date.

Which are the 10 best futures trading strategies in 2022?

Breakout trading

The breakout trading approach is often relied upon by traders for profit, and that is for good reasons. The breakout trading approach leverages the market's volatility to make traders money! 

A breakout strategy would be applied to an asset's price when it "breaks out" of its standard chart patterns, trendlines, channels, and other indicators.

To use this trading strategy, you need to recognize chart patterns that indicate the continuation of a trend - upwards or downwards. You might look for:

• Triangle pattern

• Pennant pattern

• Rectangle pattern

• Double tops and bottoms

• Head and shoulders pattern

An asset's price becomes extremely volatile after a breakout. In anticipation of breakouts, traders set up pending orders such as buy and sell stops. They expect the asset's cost to reach the level they predict before making a profit. 

The idea is to move at a price and take advantage of the volatility.

This strategy also uses stop-losses. Put a stop loss a little above where the breakout began if you're going short. It would help to place your stop-loss below the technical level when extended.

Depending on the type of breakout, you should set take-profit targets. For example, the ahead and shoulders pattern can be calculated by multiplying its height by its profit target. 

The profit target should be adjusted according to the pattern's height when you see a rectangle or triangle pattern.

A recent swing high (or low) could also be used to set profit targets. Short-term support and resistance levels show you what your profit targets will be in the short term.

Fundamental trading

You may know that changes in fundamentals catalyze most asset volatility. Technical analysis is required for most strategies, but you must also carry out fundamental analysis.

80% of trading decisions are based on fundamentals when trading an asset since fundamentals initiate and reverse trends. Therefore, no more than 20% of technical analysis should influence your trading decisions for maximum chances of success. 

It is possible to profit from a rapid rise or fall in prices by coat-tailing on announcements, raw material shortages, or bleak quarterly reports if you are buying or selling stock futures. However, using fundamentals to trade futures has some drawbacks. 

There is no such way of knowing how much an asset will increase or decrease in price. So to determine whether to go as long or short, you will need to combine fundamental and technical analysis results.

To set well-founded profit targets and stop-loss levels, technical analysis is the only reliable tool you have.

The pullback strategy

Pullback strategies profit from price pullbacks, as their name suggests.

Following a breakout, a "pullback" occurs. For example, when the price of a trending asset breaks out or dips below a support/resistance level, the price movement is reversed, and after the breakout stage, the price movement reverses. 

A resistance level will be breached, reversed, and retested as a trend moves upward. Therefore, a trader must place a long position after retesting to trade upward.

By contrast, the price generally dips below a well-established resistance level during a downtrend, reverses, and then retests the level again. The trader should enter a short position aligned with this pullback, then wait for profits to accumulate.

As traders begin to cash out their profits, their asset's price is skewed away from the breakout, causing it to decline.

Trading at this point involves waiting for the price to drop back into the support/resistance zone and normalize. Trading at a lower price allows traders to stay until the price rises again. 

Breaking a critical support or resistance level transforms it into a solid support or resistance level! 

This phenomenon has taken full advantage of pullbacks. In addition, these phenomena can be observed on a daily time frame and a 30-minute and 1-hour time frame.

Put your stop-loss orders below the previous resistance level during an uptrend to apply this strategy. Your profit target should be a recent high, and you should wait for the position to work out.

A stop-loss order must be placed below the resistance level (formerly the support level) if you are in a downtrend. Then, wait for your position to make you money by setting a recent low as your profit target.

Trading the bounce

The market tends to follow specific trends more than others. The stock market is a good example. The currencies market, for example, is characterized by a range of assets. 

The first step in using this strategy is understanding what a resistance level means. An asset experiencing difficulty rising above a particular price level faces resistance at that price level.

Traders hold all kinds of positions on the market. However, some traders may close existing positions and take their profits when the price reaches the resistance level, while others may open short positions in the hopes of making a profit. 

The asset price is pushed down due to both of these actions. Trading short at the right time and reading the market correctly leads to profits for traders.

An alternative scenario is that an asset's price falls below a certain level and eventually reaches the resistance level. 

Others will buy at lower prices and sell high later, closing their short positions with profits. By both of these means, the asset's price will rise due to increased demand.

Despite sounding simple, the strategy requires caution. First, ensure the asset is trading in a sideways range to order. When studying an asset, look for lower lows and higher highs, as these indicate a range-bound market for this strategy. 

The ADX indicator could also be used. It shows you at a glance if you're in a ranging market by following trends. ADX values below 25 indicate the market is not trending.

Keep a closer eye on the support and resistance levels so you won't be caught in a trade if they break. When buying, put your stop-loss under a critical support level and above a crucial resistance level when shorting. 

However, keep in mind that noise in the market may cause false breakouts when setting your stop-loss level. Also, it is a great idea to leave some room for volatility. Consider placing your profit target close to recent highs and lows.

Buyer and seller interest strategy

Analyzing the buyer and seller interest data is one of the best ways to determine whether you should buy or short a futures contract. According to the Depth of Market window, the data shows the volume of open buy and the sell orders for futures contracts at all price levels.

A measure of the asset's liquidity is the depth of the market or Order Book data. Lower volatility is associated with fewer orders at a price and vice versa. The data reflect trading activity in the market and is updated in real-time.

Typically, most instruments move towards the price at which the most orders are placed. For example, consider a stock that trades at $100, and the Order Book indicates there are 100 buy orders at $100, 200 at $101, 400 at $102. Conversely, there are 40 sell orders at 99 cents, 60 at 98 cents, and 150 at 97 cents.

Based on this information, you can decide about the market's interest in buying overselling and accordingly position yourself to capitalize on its potential.

Trend trailing

An excellent strategy for novice traders is trend trailing. Exercising is relatively easy, and it has a proven history of working. 

Understanding the strategy is easy. When the price rises, take a long position, and when the price is falling, take a short position. The problem with trend following is that many traders do not know when to close the trade, no matter if they've gone short or long.

You must understand how to spot trends to know when to close the position.

Price increases mean higher highs and lower lows for an asset. In this case, the lower low is caused by traders taking profits after selling off and making countertrend moves. 

Since the price is hovering around the higher low, and the trend is expected to resume going up soon, it is wise to buy in when the price is near the higher low. For downtrends, it's the right time to open a sell position at the top of a lower high.

Trend countering

Positions are taken in the opposite direction of a trend to take advantage of this strategy. Among the many strategies used, a trader should set their mindset to look for selling opportunities when prices rise and buying options when prices fall. 

There is some validity to the strategy. Whenever a market impulse moves, a price correction follows.

The 50% mark is the target for traders using this strategy. Alternatives to setting the target at Fibonacci levels include setting the target at a critical price point. Though it is riskier than most other strategies, you should be aware of using the countertrend strategy.

Long trading

One of the most straightforward futures trading strategies is the long trading strategy. Futures contracts are purchased for expecting their value to increase before the contract expires.

The ideal time to go long is when you expect the underlying asset's price to rise clearly. Analyzing the fundamentals and the technicals can help you determine the right time to invest.

Using this strategy, you can make a lot of money as long as the price rises.

Long-term investing doesn't come without risks, however. Since futures contracts are leverage-based, you stand to lose more than you invested if the price drops.

Short trading

The opposite of extended trading is short trading. When a trader sells a futures contract at its current price, trading occurs, anticipating that its price will fall to be repurchased.

The strategy is straightforward, but it is riskier than long-term trading. If you trade long, the worst that can happen is that the underlying asset's price drops to zero, which means that you cannot lose more than a set amount of money.

The potential risk is unlimited because the underlying asset's price can rise without limit. Hence, it is one of the riskiest strategies you could apply when trading futures contracts short.

Spread strategy

You buy one futures contract in the spread strategy and sell another later. By using this strategy, you will be able to take advantage of the unexpected change in the relationship between the two contracts. This will allow you to make money when the value of the contracts differs.

Due to each spread being a hedge, using this strategy will reduce the risk of losing money. When markets are volatile, this strategy's effectiveness is not decreased.

How to choose the best futures trading strategy?

Before they begin trading, smart traders always figure out how to decide on the trade. Therefore, before opening any positions, it is essential to study the market thoroughly. Before you start trading, ask yourself:

• How will this trade help me achieve my goals?

• What is my tolerance for risk? Will this trade match my risk tolerance?

• How will I pull out of a trade if things don't go my way?

• Can I make money with these types of orders?

• How will I keep up with market developments and price fluctuations?

Creating a mental guide that helps you navigate the market will come from answering these questions and reflecting on every move you make. You can lose thousands of dollars by not protecting yourself when trading futures.

You need to be involved throughout the trading process when trading futures. These trades can only be successful if you constantly evaluate the market and determine your next moves. Trading requires you to limit distractions, even though they are inevitable.

Bottom line

The right step to take is to enter futures markets if you already trade and feel that you're ready to go big. 

Besides allowing you to gain more leverage and make more money, futures markets are a place where you can test your discipline and skill. However, finding direction can prove difficult when you don't know where to begin. That's precisely what we've done here for you.

Trading futures contracts to make money is challenging, but you now have a solid foundation to build upon once you have a deep understanding of the critical strategies. If you are careful not to make these mistakes, too, you'll be successful with trading futures.