Creating a trading strategy for futures in the UK can be complex, as many factors need to be considered. First, it’s essential to understand what exactly futures are and how they work.
Futures are financial contracts that specify a future transaction of an underlying asset at a predetermined price and date. In other words, they are agreements to buy or sell something at a specified price at some point in time. Futures contracts typically involve commodities like grain, oil, metals, livestock, stock indices, and currencies.
The two main types of strategies used for trading futures
When trading futures, there are two main types of strategies that you can use: directional strategies and non-directional strategies.
Directional strategies
Directional strategies involve taking a long or short position in a particular market. In other words, you’re betting that the futures contract price will increase or decrease. When trading a directional strategy, there are several factors to consider.
First, it’s essential to keep up-to-date with market news and trends to decide when and how to enter and exit positions.
Additionally, you need to carefully analyse historical price data for the asset in question to identify patterns and predict future price movements. This information is key to picking the correct entry and exit points for your trade.
It’s also essential to understand fundamental analysis to determine what types of economic events might influence prices moving forward. Finally, you’ll need to be well-versed in technical analysis and familiar with the various trading tools, such as moving averages or oscillators.
Non-directional strategies
Non-directional strategies involve taking a position that profits from the price moving in either direction, which involves using options or spread trades, which allow you to profit when the underlying futures contract goes up or down. With these types of strategies, there are several vital considerations as well.
First, it’s crucial to understand how options work and how they are priced before entering any trades. It would help if you also familiarised yourself with concepts like hedging and arbitrage to ensure that your positions remain profitable. Aside from this, it’s essential to keep up-to-date with market news and trends to know when to exercise your options or close out your contracts. Finally, you’ll need to be well-versed in technical analysis and familiar with trading tools like charts, triggers, and scanners.
What types of analysis are used in futures trading?
Several types of analysis are commonly used in futures trading, including technical, sentiment, and fundamental analysis.
Technical analysis
Technical analysis involves studying historical price data to identify patterns and predict future price movements using tools like moving averages, oscillators, and charting software.
Fundamental analysis
Fundamental analysis involves assessing economic factors that might impact the price of a particular asset or market. Some common economic indicators used in this analysis include GDP growth rates, interest rates, unemployment figures, consumer confidence indices, and inflation levels.
Sentiment analysis
Sentiment analysis is based on analysing social media trends or news articles to understand how market participants feel about a particular asset or market. This approach helps identify possible price reversals or market bottoms.
What are the benefits of using a trading strategy?
There are several benefits to using a trading strategy when trading futures. First, having a clear plan and guidelines can help you make more informed decisions, reduce risk exposure, and improve your overall profitability.
Additionally, understanding the different types of analysis used in futures trading can help you identify market trends and predict price movements more accurately. Finally, being well-versed in technical tools like charting software and scanners can help you spot new opportunities or manage existing positions more effectively.
Overall, using a trading strategy when trading futures allows traders to manage risk, take advantage of market trends, and maximise their profits over time.
The bottom line
When creating a trading strategy for futures in the UK, carefully considering all the different factors involved is essential. By understanding markets, price movements, and trading tools, you can create a successful strategy to help you achieve your financial goals.
