Futures Trading and Stock Trading are two very different things. Both activities are very similar and it is all about buying low and selling high, however, the way this is achieved differs between both types of trading.
Futures trading requires more advanced techniques than stock trading. But this doesn’t necessarily mean that one is harder than the other, it just means that there are differences in the underlying mechanisms of each activity to be profitable and these variations require different tools and approaches at certain times.
Whether you’re just contemplating the idea of becoming a trader or you’re already day trading cryptocurrency, knowing these tools and techniques will help you improve your operations. But before going into more details about each technique, we must first talk about a specific tool.
If you could rank all the available tools, bracket orders would probably be in the first place.
Bracket orders in trading are one the most useful among all the strategies, some people go as far as to say they are their single most important tool. If you plan correctly, this can be useful to avoid the temptation of making emotional decisions and increase the chances of making a profit.
The concept of bracket orders is pretty simple. You basically set 3 orders simultaneously; a short sell order that will be “bracketed” between a buy stop order and a buy limit order. The three elements can also be defined as entry order, profit target and stop loss.
An even simpler way to look at it.
With this automated tool you can set the minimum price you’re willing to sell, the maximum price you’re willing to pay and the maximum loss you’re willing to accept. Once you have it set, you don’t need to stick in front of your computer all day long. It’s biggest benefit is that you can reduce risks and set limits especially when trading in volatile markets.
This explanation is the easiest way of looking at it, and while it is beneficial in both terms of efficiency and risk management, successfully pulling it out does require some experience and knowledge.
Now that we have explained the importance of bracket orders in futures trading we can now see some of the techniques.
Future’s Trading Techniques
A very popular approach among many traders.
The objective of breakout trading is to take advantage of the high market volatility that happens after a price breaks out of some patterns. After a breakout occurs, it is very usual that the market will start experiencing these high volatility periods in which you can profit by making the right moves.
The type of breakout has a great impact on your target. There’s the “Triangle and Rectangle Pattern”, for example, in which the profit can be equal to the height of the pattern. Similarly, the “Head and Shoulders Pattern” is measured from “the neck”.
The Pullback Strategy
As the name states, this strategy is based on price pullbacks. This is when a price breaks through a resistance or support level, reverses and goes back to that level. The resistance level is a price point at which the stock is having difficulties breaking above, while the resistance level is a low price that the market did not go below.
As a trader during an uptrend you would have to enter with a long position in that same direction. During a downtrend you would enter with a short position, always following the underlying trend.
The reason for this is that a pullback occurs when traders push the price in the opposite direction of the breakout by taking profits, then a second wave of participants (the ones who missed out) wait until the price returns to the previous level, thus pushing the price again.
Trading the Range
This is a technique used in certain markets or certain situations in which prices maintain within a range. This simply means that there is an absence of new highs and new lows. Although currency markets tend to trade in a range, this is usually temporary in the cryptocurrency market.
When the market keeps within this range in which the resistance and supporting levels remain unbroken it can be attributed to the human behavior. As soon as a price is reaching one of these limits traders start to collect their profit, causing prices to go in the opposite direction.
Although resistance and support levels play an important role here, there is a big difference with the Pullback strategy, in which those limits are actually broken. In this case, you DO NOT want to stay inside a trade if the level is broken. A stop-loss must be placed near the desired limit but leaving some in case a fake breakout occurs.
A very easy to follow a strategy that doesn’t require much effort but some caution.
Following a trend is not the same as the dreaded “herding” mistake. Herding is basically just following what everyone else is doing despite the potential risks. Following a trend as a strategy, however, means that you’ll enter a trade in the direction of the underlying trend.
If the trend is up you enter a suitable long position, if the trend is down, on the other side, you enter a suitable short position.
The important thing here is to be aware of the best time to enter. You’re not buying just because there’s an uptrend, you must look for the highest low which is the bottom of the price correction. The same is true for the downtrend, you must look for the lowest high to sell.
Most Futures Trading Techniques Take Advantage Of The Current Market Behavior
There are a lot of patterns that have already been defined, although these patterns can be entirely defined and described using the already collected data there’s an undeniable amount of emotional factors that influence the market behaviors.
Understanding these behaviors and the interest of the market as a whole can greatly improve your ability to put in practice these techniques.