Approaches to Futures Trading
There are many approaches, strategies, methods and techniques when it comes to trading futures. Choosing the right trading approach and strategy is very crucial for your success as a trader and investor. Whether you are a beginner or an experienced trader, you will need to follow some sort of trading strategy to increase the odds of profitability of your trade.
Some of the approaches to trading that have benefited traders are technical analysis, fundamental analysis, momentum trading and news approach.
Technical analysis is a method of evaluating the price of the underlying commodity with the assumption of market data. This includes price charts and technical indicators.
Technical analysts forecast future price movements of the underlying commodities by relying completely on variables in price charts and ignoring fundamental concepts, news and economic indicators.
Assume you are trading Crude Palm Oil Futures (FCPO). The underlying commodity in this case is the Crude Palm Oil. Based on support and resistance lines and well as the MACD indicator, you believe that the market will go on an upward trend; you will therefore enter into long position in this market.
Technical Analysis Using A Chart
This approach is a method of evaluating the prices of the futures market by examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts attempt to study factors that may affect the futures prices of the underlying commodity such as overall economy like macroeconomic factors as well as industry conditions. This type of analysis is considered to be the opposite of technical analysis.
Assume you are trading Crude Palm Oil Futures (FCPO). According to fundamental analysis, there is an increase in the demand of FCPO. You believe that the prices for FCPO will increase and thus you will enter into a long position for this market.
The focus of momentum trading approach is to identify strong trend movements, primarily based on high volume trend. It is done by measuring the amount of which the commodity’s price has changed over a given time span.
Commodities that appear to produce momentum and volatilities are often caused by major breaking news from either local, foreign or both. High momentum is often caused by investors trading in large positions.
A momentum is identified when a particular commodity that is stagnant for a period of time has a sudden increase in trade volume of either buying or selling contracts.
Assume the FBM Kuala Lumpur Composite Index Futures (FKLI) has been quiet for the past 2 weeks but sees an increase in buying volume the following week. A momentum trader will look for a market entry point to ride on this event which will likely be the sign of retracement.
Chart Showing Momentum Trading
Another approach to futures trading is the news approach. Relying on news can be also one of the profitable ways to trade because news can have a strong influence on market prices. The high frequency of news affecting the market prices creates a lot of opportunities to enter into the market.
News sources can be economic news, broker news, commodity newsletters and online news portals.
News From Market Watch
Assume you are trading FBM Kuala Lumpur Composite Index Futures (FKLI). The government announces an increase in expenditure. You believe that this will affect the Kuala Lumpur Composite Index (KLCI) to rise and thus affecting the FKLI since the underlying index is the KLCI. Thus you will enter a long position in the FKLI.
These are some of the approaches to futures trading. Before choosing an approach, it is important to understand your strengths and style of trading before focusing on an approach. For example, do you like to watch the news or do you prefer to look at charts and prices? Either way, mastering a strategy that suits you can be enormously profitable in time to come.
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