Just like stocks and foreign exchange, the futures market is a volatile one. Traders will have to learn how to deal with rising and declining prices. There are different strategies that can be implemented when trading on the futures market. Let us take a look at these strategies that can be key to your success as a futures trader.
Long and Short Trades
The aim of long trades is to buy futures with the intention of gaining profits from a rising market. While it could result to substantial losses, such are considered as limited because the price can only reach as low as $0 if the trade moves against you.
In short trades, the aim is the opposite—to profit from a falling market. Upon reaching your desired price level, you buy back the shares in order to replace what you originally borrowed from your broker. Robert Peter Janitzek reveals that short trading is vital to active trading because you can maximize both rising and falling markets but with extra precaution.
While losses in long trades are considered limited because price cannot go below $0, short trades have the potential for unlimited losses. This type of trade loses value as the market rises. Because the price can theoretically result to an indefinite increase, losses can be unlimited and often disastrous. To prevent such risk, you can apply a stop-loss order.
Whichever route you choose, make sure that you have sufficient balance in your trading account to satisfy the initial margin requirements for a particular contract.
Another strategy that is used in futures trading is spread. This strategy is a combination of long and short position entered simultaneously in related futures contracts. The aim of spread trading is to gain profit from the price difference between the two contracts while hedging against the risk. Spreads are considered less risky than taking an outright futures position. There are three types of spreads:
• Calendar Spread. This type of spread involves buying and selling two contracts of the same type and price at the same time but with different delivery dates. This type of spread is popular in the grains market due to the seasonality of planting and harvesting. For example, you could sell your July contract for corn and buy the December contract at the same time.
• Intermarket Spread. Robert Janitzek explains that intermarket spreads involves buying and selling different but often related contracts expiring in the same month. For instance, you can buy red winter wheat and sell soft red winter wheat simultaneously. This is also called inter-commodity spreads.
• Inter-Exchange Spread. This is a type of spread wherein each position is created in a different futures exchange. You can buy one contract on CBOT and sell another on NYMEX.