Trading Futures for Beginners: Effective Strategies to Trade Futures CFDs

Trading Futures for Beginners: Effective Strategies to Trade Futures CFDs, FP Markets

The US stock market is open Monday through Friday from 09.30 am to 16.30pm in New York.

When exchanges close, almost everything comes to a halt – almost.

Unlike regular stocks, the futures market operates nearly 24 hours a day, five days a week.

What is the futures market and why do traders and investors talk about it?

Often shortened to futures, the futures market is an exchange-based forum comprised of different futures contracts, allowing participants to buy or sell an asset at a future date for an agreed-upon price. Futures are derivative-based contracts – price change is derived from the underlying asset.

Common underliers include commodities, currencies, and even indices.

 

Futures CFDs

Thanks to the wizardry of modern technology, CFDs (contracts for difference), or futures CFDs, can be executed through MetaTrader 4 (MT4) and MetaTrader 5 (MT5) trading platforms.

Unlike futures contracts that trade via a futures exchange (think Chicago Mercantile Exchange [CME]), futures CFDs are over-the-counter (OTC) derivatives. With CFD trading, speculators bet on rising and falling prices of the underlying futures contract, without owning or having any indirect interest in the financial instrument.

Futures CFDs can only be traded during the open market hours of the relevant exchange on which the underlying financial product is traded. When trading futures CFDs, similar to underlying futures contracts, expiration dates also need to be taken into account.

Futures CFDs, therefore, are essentially derivatives of a derivative.

 

How to Trade Futures CFDs?

How to trade futures CFDs or any market for that matter, is, of course, trader dependent.

Some CFD traders use fundamental analysis, others favour technical analysis. Experienced traders, however, tend to focus on a combination of the two.

Technical analysis refers to the study of price movement.

Irrespective of the financial market traded, a technical analyst reads the movement of price.

For example, trends are analysed to forecast future movement. Technical tools also overlay price fluctuations in an attempt to estimate future reversal points – drawing applications are available enabling traders to include support and resistance points, supply and demand areas, and trendlines in their analysis. In addition, technical indicators are popular, such as simple moving averages – an average price over a given period of time – and the relative strength index, or RSI, a momentum oscillator.

Fundamental analysis, on the other hand, is a process in which traders evaluate financial, economic, and geopolitical influences to determine direction. Fundamental analysis helps answer the question why a market moves in a certain way.

 

Technical Analysis

The majority of retail investors/traders employ technical-based trading strategies.

Rightly or wrongly, some traders believe fundamental data has already been reflected in the market, therefore, technical analysis is considered a simple and effective forecasting tool to base trading decisions on in real-time.

 

Trend Trading

Trend trading is a popular technical-based approach. Although simple in concept, it is somewhat difficult in practice.

The core objective is to identify, with a minimum risk of error, a trend in its infancy and enter a position in the direction of the expected trend. Trends are identified in a number of different ways, with most using trendlines or moving averages. Generally, price crossing below a moving average indicates a possible trend change to the downside and vice versa on moves back above the moving average. The same can be said for trendlines.

It’s also worth pointing out trends are fractal – a trend is influenced by its next larger/smaller trend. For that reason, trends can be identified on the lower timeframes, providing day traders (day trading) the opportunity to participate in intraday trends.

As shown in figure 1.A, the 200-day simple moving average is applied to the EUR/USD (a popular currency pair in the Forex market) daily timeframe which has been drifting lower since May 2018, with price action ultimately remaining south of the dynamic value since then. This unlocks a bearish tone, highlighting a sellers’ market.

In the event price action breaks above the aforementioned moving average, traders would consider this a potential trend change and maybe focus on bullish themes.

Trading Futures for Beginners: Effective Strategies to Trade Futures CFDs, FP Markets

(Figure 1.A)

 

Price Action

While the term price action means different things to different traders, price action, in this case, refers to concepts such as support and resistance, supply and demand, and trendlines.

In conjunction with trend studies, traders tend to adopt a price action structure to help secure entry and a stop-loss position (risk management). It also serves well as a trade management tool.

As shown in figure 1.B, using the same EUR/USD daily chart, trend line resistance (1.2555) joined the 200-day simple moving average in June 2019. This combination, despite a fleeting move above the SMA/trendline, was sufficient to put a lid on the upside and guide the market lower.

Following this, knowing the trend faces a southerly trajectory, traders also had the opportunity of adding to short positions of a local supply around 1.1277ish and again at another area from 1.1175ish.

We know, having seen price action trending lower, as determined by the 200-day simple moving average, shorting supply zones over attempting to enter long from demand areas is the higher-probability setup in this case.

Trading Futures for Beginners: Effective Strategies to Trade Futures CFDs, FP Markets

(FIGURE 1.B)

 

Chart-Based Technical Patterns

Traditionally, technical analysis has been closely associated with technical chart-based patterns.

Common patterns include:

 

  • Rectangles also called trading ranges/consolidations.

 

  • Double/triple tops/bottoms.

 

  • Triangle formations: ascending, descending, and symmetrical patterns.

 

  • Flags, pennants, and wedge patterns.

 

  • Head and shoulder’s top/bottoms.

 

Like price action structure, traders can combine chart patterns in-line with the market trend.

Like price action structure, traders can combine chart patterns in-line with the market trend.

As demonstrated in figure 1.C, a symmetrical triangle formed at the market top, considered a bilateral pattern. Additionally, a head and shoulder’s top formed in early 2020 around the 200-day simple moving average, which, as you can see, initiated a healthy move to the downside.

Trading Futures for Beginners: Effective Strategies to Trade Futures CFDs, FP Markets

(FIGURE 1.C)

 

DISCLAIMER: The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation, or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com, and should be considered before deciding to deal with those products. Derivatives can be high risk; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.

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