Featured Article:
February 6th, 2012
Futures Trading Strategy – How to Trade Futures
By Pak Man Yuen
Here are the three major types of futures trading strategies that the pros use – trendline trading, cycle trading and seasonal trading.
Trendline Trading
What does trendline trading mean? Simply put, you seek to trade with the trend – as seen in the chart patterns. Recognize the larger market trends and pay less attention to the ‘noise’ in the daily fluctuations. Markets tend to move in the direction of the trend over time, so attempting to trade against the trend would be almost suicidal. Place stop losses below the trendline, and take profits when the market approaches the resistance line.
Cycle Trading
In order to trade cycles effectively, you need to first find a market with reliable cycles. Reliable cycles in stock index futures include the 20 to 23 week cycles and the 14 day cycle. As for grain and livestock markets, the 9 to 11 month cycle would be a good guide; and for the silver and gold markets, the 28-day cycle. Interest rate futures follow an approximately 32-day cycle.
Avoid markets that are highly correlated, as this would expose you to even higher risk than necessary; both markets would tend to move in the same direction. Should your prediction go wrong, you would take losses on both fronts. Markets that tend the follow similar basic cycles should thus be avoided.
Seasonal Trading
Seasonal trading can be one of the most effective trading methods. While other trading methods may have a strong theoretical backing, they have little empirical evidence of success. In contrast, the seasonal trading method may have almost no theory supporting it, but tends to perform the best empirically. This method operates on the assumption that certain markets tend to peak or trough at certain months of the year. This is especially true in commodities markets, where prices may fluctuate along with the seasons.
In contrast, seasonal price tendencies can generate success rates of up to 80 percent in some markets. There are three major types of price tendencies: seasonals in cash prices, futures prices, and in futures spreads. Seasonals in Cash Prices tend to operate on a month-to-month basis. Seasonals in Futures Prices tend to operate on a week-to-week or even a day-to-day basis because of the nature of futures; new futures are generated as previous ones expire, and different contract months will reflect different fundamental conditions. Seasonals in Futures Spreads essentially reflect the relationships between two different but related markets or between two different contract months in the same commodity.
Yuen is a financial expert, personal finance specialist and motivational speaker who writes for the Financial Freedom Guide and other major financial blogs. His writing emphasizes financial independence and the creation of long term residual income streams. Read his success story at Site Build It Reviews.
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