7 Crypto Futures Trading Strategies You Need To Know

FxBrokerReviews.org – Futures are well-liked trading products whose value is derived from the underlying financial product. You must have a clearly defined trading strategy that assists you in managing your risk and refrains from trading emotionally if you want to start trading futures contracts and become a successful futures trader.

We’ve included our favourite futures trading methods with an explanation of each in this article. This covers areas of entrance and exit as well as mistakes you should steer clear of while trading the futures market.

What Are Futures?

Futures are standard financial agreements that bind both parties to buy or sell an item at a predetermined price and later date. Despite the current market price, traders who trade futures are required to abide by the conditions of the futures contract by its expiry, unlike buyers of options who have the right but not the responsibility to execute their options.

Because futures are standard contracts, the amount of the underlying asset is always specified with precision. A contract for natural gas has a value of 10,000 MMBtu (million British thermal units), one for crude oil is for 1,000 US barrels, and one for gold is for 100 fine troy ounces, for instance.

The most typical uses of futures contracts are for hedging and speculating. For instance, a farmer may want to purchase a corn futures contract with a set price and execution date to hedge against declining maize prices. The farmer will then be aware of his possible selling price in advance.

Futures contracts are used by speculators to bet on the market and profit from declining or increasing prices of the underlying instrument. Since futures contracts can be routinely traded through an interchange, most are not kept until their execution date. The underlying instrument’s current market value determines a futures contract’s price.

Crypto Futures Trading Strategies

1. The Pullback Strategy

The pullback technique is a potent futures trading approach based on price pullbacks. In trending markets, a withdrawal happens when the price reverses and retests a support or opposition level after breaking above or below it. Price breaks over a recognized resistance level during an upswing then reverses and retests the level. A trader would open a long position in the position of the underlying uptrend when the retest is over.

A strong support level is broken below during downtrends, and the price then reverses and confirmatory testing the level. A trader would enter this pullback with a short position in the underlying downtrend.

Pullbacks occur when traders start to book profits, which causes the price to move reversely toward the breakout. Market players who skipped the initial price movement are waiting for the price to re-enter at the broken support/resistance level at a more advantageous price, driving the price up once more.

Pullbacks make use of a crucial technical analysis phenomenon. A critical support or resistance level shifts from being a support or resistance level, depending on whether it is broken, to becoming one.

A support level that is broken turns into a resistance level, and a resistance level that is broken becomes a support level. While it can also be seen on shorter-term durations like the 30-minute or 1-hour ones, this is particularly evident on higher timeframes like the daily ones.

Aiming for the most recent highs as their profit goal while trading pullbacks, traders should place stop-loss orders slightly below the retested support level (formerly resistance) during uptrends. Similarly, profit targets should be set during a decline at recent lows, with stop-losses above the retested resistance level (once support).

2. Trading The Range

Trading off significant support and resistance levels on a chart is called trading the range. While specific markets, like equities, prefer to trade in a trend, others, like currencies, prefer to trade in a field.

The majority of market participants are still sentient beings with feelings and memories. Market players will refer to a price level as a resistance level if the market finds it difficult to break over it. When the price reaches the same story, some traders will start taking profits, while others will begin trading short, both of which will raise the selling pressure on the financial instrument and probably cause the price to fall.

On the other hand, if the price finds it difficult to fall below a particular level and reaches that level once more, market participants who have been shorting the market may start taking profits. In contrast, others may begin buying at those lower prices, both of which will increase buying stress on the financial instrument and probably drive the price up. Support levels are the names given to certain levels.

The first consideration when trading the range is if the market is genuinely trading in a field (sideways). The current market environment is a ranging market if there aren’t any more extraordinary highs or lower lows in the price, which are indicators of a trending market.

Place the stop-loss level close to the trading support/resistance level, but leave some space around it to accommodate for false breakouts, instability, and market noise since you don’t want to stay inside a trade if the level is breached. Profit targets should be close to previous highs/lows, S/R zones, or other significant technical levels.

Also read: Crypto Futures Trading: Definition And How Does It Work?

3. Breakout Trading

Breakout trading, one of the most well-liked day trading strategies, is prevalent among futures traders. As its name implies, breakout trading tries to capitalize on the market turbulence that happens when the price pierces chart patterns, channels, moving averages, horizontal S/R levels, and other technical levels.

The head and shoulders pattern (trading the neckline breakout), rectangle, pennant, and triangle patterns, which frequently indicate a continuation of the underlying trend, as well as double tops and bottoms, are common chart patterns for trading breakouts.

The market typically becomes more volatile immediately following a breakout as several pending orders start to be filled. By placing trades in the breakout’s direction, breakout traders attempt to profit from the surge in volatility.

Breakout day traders frequently employ pending orders to capture a breakout trade. Pending orders like buy stops and sell stops become marketplace orders when the price hits the predetermined price level. In this manner, traders can take advantage of the subsequent volatility without waiting for the actual breakout to occur.

Stop-loss levels are typically positioned just above or below the technical level where the price broke out (for short or long positions, respectively). Markets frequently see pullbacks to the technical level that has been breached, allowing traders to increase the size of their positions and welcome new traders to the market.

Take-profit objectives vary according to the kind of breakout. When a head and shoulders pattern is projected from the breakout point, for instance, the profit objective is equal to the pattern’s height, calculated from the neckline to the top of the head.

Also read: Crypto Options Trading And How To Gain Profit

4. Fundamental Trading Strategy

Although most of the futures trading methods described in this article are technical, you should be aware that most price movements with significant volatility resulting from changes in the underlying asset’s fundamentals. Trends are started and stopped by fundamentals, and practical support and resistance levels are broken.

Professional futures traders must stay current on the financial instrument’s underlying developments. Fundamental traders often base 80% of their trading choices on fundamental analysis and 20% on technical analysis.

Fundamental research needs to give traders precise price levels to trade on; this is where technical analysis comes into effect. Technical analysis is used to create profit goals and stop-loss levels, while fundamental analysis is used to decide whether to go long or short.

Following micro-fundamental releases is a simple but successful fundamental trading method. Look at the three most recent reports’ trends. Economic growth reports, inflation statistics, and labour market data, for instance, can significantly impact exchange rates if you trade currency futures.

Central banks use these reports to modify their monetary policies. Central banks typically lower interest rates to boost economic activity when economic growth slows, inflation remains low, and the unemployment rate increases.

Contrarily, when economic growth is strong, inflation data is close to the central bank’s inflation objective, and labour markets are robust, central banks typically raise interest rates to prevent the economy from overheating. Rate increases result in currency appreciation, whilst rate decreases result in currency depreciation.

Traders can obtain a sense of the direction of the central bank’s policies by keeping track of these reports and their previous three issues. Which scenario is most likely: a rate decrease or a rate hike? Fundamentals should serve as your starting point for trading, while technical analysis should be used to optimize entry and exit points. A similar approach can be used on several markets, including futures on stocks, commodities, and metals.

5. Buyer And Seller Interest

To determine whether to purchase or sell a futures contract, traders use the information on the buyer and seller’s interest. The Depth of Market (DoM) window, which displays the amount of open buy and sells orders for a futures contract at various price levels, is a gauge of the buyer and seller interest.

The Depth of the Market displays the liquidity for the underlying stock; more market orders indicate higher liquidity at higher prices and vice versa.

Since it displays the number of pending orders for the underlying security or currency, some brokers refer to the state of the market as the order book. These listings are continuously updated to reflect the most recent market trade activity.

Large trading orders will only significantly impact the price of a security with excellent liquidity like Amazon. Nevertheless, even small trade orders can dramatically affect the price if the market’s depth and liquidity could be better. Trading methods based on the market’s depth or order book can be effective.

For instance, if stock X is trading at $50 and the DoM displays 100 buy orders at $50.10, 200 buy orders at $50.50, 400 buy orders at $50.80, and 250 buy orders at $51.00, while the sell-side displays 40 orders at $49.90, 60 orders at $49.70, and 150 orders at $49.60, a trader might conclude that there is overall more buying interest than selling interest in the stock. Stocks and other financial instruments frequently move toward price levels where there are the most orders.

6. Trend Following

Trend-following tactics are some of the most effective methods for trading futures. They are simple to follow, have a good track record, and work (most of the time). These tactics seek to move toward the underlying trend, as their name implies. A trend-following strategy would only search for viable long positions if the movement were upward. Similarly, a trend-following approach would only consider prospective short positions if the trend was downward.

The adages “buy low, sell high” and “the trend is your friend” may be familiar to you. But how does a trader determine whether to buy at a “low” and when a “high” is appropriate? Let’s quickly go over how trends develop to address that crucial topic. Price moves upward by making higher and lower lows, with each higher low signifying a reversal of the movement. These counter-trend moves are price adjustments that occur as a result of sellers beginning to push an overextended upward rise lower or as a result of profit-taking actions.

The higher low, or the bottom of the price correction, is the optimum point to buy during an upswing. This is precisely the time for the underlying upswing to pick back up. The same is true for downtrends; however, to enter with a sell position, you would search for the tops of lower highs. The Dow theory states that a price correction typically reaches 50% of the initial impulsive move. Be on the lookout for retracements between 38.2% and 61.8% regarding Fibonacci levels.

7. Counter Trend Trading 

Taking positions against the underlying trend is referred to as counter-trend trading. In the case of a counter-trend trader, selling opportunities would be sought out during uptrends, and purchase chances would be sought out during downtrends.

Counter-trend traders set their profit goals at about 50% of the impulse advance or a significant Fibonacci level to profit from the price correction that follows each impulse rise. Only seasoned traders should use counter-trend trading methods since they are typically riskier than the other tactics covered in this article.

Take Away 

If you have a clearly defined trading strategy and practise risk management, futures trading can be a fascinating and successful endeavour.

Give the pullback approach a try if you’re new to trading. It has a sizable following among retail futures traders and is a well-liked trading strategy. We also enjoy employing trend-following techniques and trading in line with the current trend. Regardless of your trading technique, keep in mind to trade on liquid markets, close your positions overnight if you’re a day trader, and over the weekend if you want to avoid taking on more risk.

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