Top Futures Trading Strategies for 2024 - Quantified Strategies (2024)

The futures market is exciting because of its good liquidity, and unlike equity day trading, there is no reasonable entry barrier, as you can start with as low as $500. But what exactly are futures? And can you find profitable futures trading strategies?

Futures are derivative financial contracts that obligate a trader to buy or sell an asset at a predetermined future date for a set price. When a futures contract expires, the buyer must buy and receive the underlying asset and the seller of the futures contract must provide and deliver the underlying asset, or the contract is settled with cash, regardless of the current market price at the expiration date.

At the end of the article, we provide you with many potential and profitable futures trading strategies (backtested).

Let’s go on to look at the futures market and some futures trading strategies:

What are futures?

Futures are derivative financial contracts that obligate a trader to buy or sell an asset at a predetermined future date for a set price. Similar to options, a futures contract involves both a buyer and a seller. But unlike options, which can become worthless at expiration, when a futures contract expires, the buyer is obligated to buy and receive the underlying asset and the seller of the futures contract is obligated to provide and deliver the underlying asset, regardless of the current market price at the expiration date. The underlying assets could be physical commodities or financial instruments (see more below).

Futures contracts are traded on futures exchanges like the CME Group. You would need to have a brokerage account that’s approved to trade futures before you can access the exchange. To facilitate trading on a futures exchange, futures contracts are standardized — each contract has details of the underlying asset.

Industry stakeholders and institutional investors may trade futures to hedge the future price risk of a commodity on their operations or investment portfolio. They trade futures with the intention to receive or deliver the underlying asset.

For retail traders and other speculative traders, futures are used for speculation since the market is generally liquid and can be bought and sold up to the time of expiration. Speculative traders buy or sell futures to potentially profit from the direction of the market for a commodity. Before the contract expires, they initiate the opposite position to close out their trade and eliminate any obligation to receive or deliver the underlying asset.

Please also keep in mind that all derivative markets are a zero-sum game (to better understand why read our article called is the stock market a zero-sum game).

History of futures trading

The history of modern futures trading can be traced to 1730 when the Dojima Rice Exchange was established in Japan for the purpose of trading rice futures. In the West, commodity futures trading started in England during the 16th century, but it was not until 1877 that the London Metals and Market Exchange, the first official commodity trading exchange in England, was established.

Meanwhile, in the United States the earliest official commodity trading exchange, the Chicago Board of Trade (CBOT), was established in 1848. The first traded futures contracts in the U.S. were corn contracts, followed by wheat and soybeans — these three soft commodities still account for the bulk of trading business conducted at the CBOT.

Subsequently, the New York Cotton Exchange (NYCE) was created in 1870, and the Chicago Produce Exchange in 1874. Following World War 1, in 1919, the Chicago Butter and Egg Board reconstituted to become the Chicago Mercantile Exchange (CME), to offer public participation under carefully supervised commodity trading regulations.

Understanding how futures work

Futures contracts were created to help farmers, producers, and other stakeholders in the production and utilization of any commodity to plan for the possibility of wild price swings (up or down) ahead. To make it easy, let’s illustrate with a wheat farmer (example):

Supposing a wheat farmer wants to lock in wheat prices for his produce to avoid an unexpected decrease during harvest, he may choose to sell a futures contract, which allows it to sell a set amount of wheat for delivery in the future (during harvest) at a specified price. On the other end, a flour producer can decide to buy a futures contract to ensure it has a steady supply of wheat and to protect against an unexpected increase in prices. Now, both parties are in a contract to exchange 1 million bushels of wheat at $3 per bushel sometime in the next 6 months.

Obviously, both parties in this example need to trade the underlying commodity, so they are trying to hedge against possible unfavorable market prices in the future. They use the futures market to manage their exposure to the risk of price changes.

However, not everyone in the futures market wants to exchange the underlying in the future, as some are speculators, who seek to make money off of price changes in the contract itself or investors who just want to diversify their portfolio. The presence of speculators, investors, hedgers, and others buying and selling daily makes futures a relatively liquid market.

Uses for futures

In the financial world, futures are generally used for hedging (risk management) and speculation.

• Hedging: This is where an industry stakeholder uses futures contracts to protect their business from possible future price fluctuations in the underlying asset. When futures contracts are bought or sold with the intention to receive or deliver the underlying commodity, it means that hedging is the reason for the trade. Companies and institutional investors use it as a way to manage the future price risk of that commodity on their operations or investment portfolio.
• Speculating on asset prices: Because futures contracts are generally liquid and can be bought and sold up to the time of expiration, speculative traders who don’t wish to own the underlying commodity trade them to profit from price fluctuations. They can buy or sell futures to express an opinion about the direction of the market, then offset their trades prior to expiration by taking the exact opposite position so as to eliminate any obligation to exchange the actual commodity.

Exchanges where futures are traded

Futures exchanges are central marketplaces where people can trade standardized futures contracts. A futures exchange provides physical or electronic trading venues, details of standardized contracts, market and price data, clearing houses, exchange self-regulations, margin mechanisms, settlement procedures, delivery times, delivery procedures, and other services necessary for trading futures contracts.

Examples of futures exchanges around the world include the Chicago Mercantile Exchange (CME) Group, Intercontinental Exchange (ICE), Minneapolis Grain Exchange (MGEX), Euronext Paris, Eurex Exchange, and London Metal Exchange (LME).

Types of futures

There are many types of futures contracts based on the underlying assets. They include a wide range of financial and commodity-based contracts, such as indexes, currencies, and debt instruments, as well as energies, metals, and agriculture products. Let’s take a look at each of them:

Financial futures

These include futures contracts whose underlying index is an equity instrument, an index, or a debt instrument. Examples are single stock futures, index futures, and interest rate futures. Single stock futures have a stock, such as Amazon, Microsoft, Apple, etc., as the underlying asset, while index contracts, such as the E-Mini S&P 500, E-Mini Nasdaq, E-Mini Russell 2000, Mini Dow Jones, E-mini Mid-Cap 400, Micro E-minis (multiple indices), Nikkei 225, Bloomberg Commodity Index, Volatility Index, and so on, provide exposure to specific market index values.

Bonds and interest rate contracts are used for exposure to the interest rate of a specific debt instrument, such as the U.S. Treasury Bonds, U.S. 10-Year Notes, U.S. 5-Year Notes, U.S. 2-Year Notes, Eurodollars, Federal Funds, and Ultra Bonds

Currency futures

Currency futures contracts provide exposure to the exchange rate of different currency pairs, such as EUR/USD, GBP/USD, JPY/USD, and so on.

Cryptocurrency futures

This is a new set of futures contracts, which has a cryptocurrency as its underlying. An example is the CME Bitcoin futures. There are also futures on other crypto coins traded on various crypto exchanges.

Energy futures

These futures provide exposure to the price of common energy products used to run the economy. Examples include Crude Oil, Natural Gas, Heating Oil, Gasoline, and Ethanol.

Metal futures

These futures contracts provide exposure to the price of precious metals, as well as industrial metals that many companies rely on as materials for manufacturing and construction. Examples include Gold futures, Silver futures, Copper futures, Steel futures, and so on.

Grain futures

These offer exposure to the prices of raw grain materials used for animal feed and other commercial products, as well as processed soybeans. Examples include corn, soybean, wheat, oats, and so on.

Livestock futures

These contracts provide exposure to the prices of live animals used in the supply, processing, and distribution of meat products. Examples include Live Cattle, Feeder Cattle, and Lean Hogs futures.

Food & fiber futures

These are known as “softs”, and they offer exposure to the prices of specific agricultural products that are grown and the prices of dairy products. Examples include coffee, sugar, cocoa, cotton, milk, and orange juice futures.

Why trade futures

There are many reasons to want to trade futures. These are some of them:

• The ability to trade on a margin: Futures contracts are leveraged, so you trade a big position size by depositing only a fraction of the position’s worth, while your trading provider loans you the rest. Unlike in equity trading where a margin account requires you to pay 50% or more of its full value, the initial margin amount in futures is typically set between 3-10% of the underlying contract value. However, note that your profit or loss will be determined by the total size of your position, not just the margin used to open it, so with a lower margin (higher leverage), your loss can get a lot bigger than your deposit. This is why it’s very important to manage your risks when trading futures.
• Access our deep liquidity: The futures markets are particularly liquid. So, if you deal in larger sizes, you can buy or sell at your desired prices.
• Avoid overnight funding charges: With futures, the overnight funding charge is included in the spread. You won’t incur multiple overnight funding charges.
• Go long or short: Unlike in equities where you have to borrow shares to short sell, with futures, you can go long or short with ease.
• Diversify your investments: Futures provide a few ways to diversify your investments, in ways stocks and ETFs can’t, and they can give you direct market exposure to underlying commodity assets, unlike secondary market products like stocks. You can use futures to manage some risks surrounding upcoming events that could move the markets. In addition, futures allow you to access specific assets that aren’t typically found in other markets.
• Hedge your existing positions: You can use futures to hedge your exposure in the stock market. For example, if you own shares in companies in the Nasdaq 100 and are concerned about their value dropping, you could short a Nasdaq 100 index future – the profits from which would hopefully offset a proportion of your share position losses. On the other hand, if you had current short positions, you could go long on the index future in case the market rises, so your long profits would offset your short losses.
• Speculate on a wide range of markets: Futures allow you to trade a wide range of instruments, including indexes, commodities, and bonds.
• Gain some tax benefits: Futures can provide a potential tax benefit compared to other short-term trading markets, as profitable futures trades are taxed on a 60/40 basis: 60% of profits are taxed as long-term capital gains and 40% as ordinary income. In stock trading, on the other hand, profits on stocks held less than a year are taxed 100% as ordinary income.

The pros and cons of futures

Some of the pros of the futures market include:

• Easy to access: The entry barrier is low, allowing investors to participate in markets they would otherwise not have access to.
• High liquidity: Most futures markets have high liquidity, which enables traders to enter and exit the market when they wish to.
• Hedging against future risks: Futures contracts are used as a hedging tool in markets with a high level of price fluctuations. For example, farmers use these contracts to protect themselves against the risk of a drop in crop prices.
• Simple pricing: Unlike the extremely difficult options pricing models, futures pricing is quite easy to understand. It’s simply based on the cost of carrying to the spot price of the asset.
• Stable margin requirements: Margin requirements for most assets in the futures market are known to traders.

Despite the merits, futures come with some demerits. Here are some of the cons:

• Expiration dates: Future contracts have expiration dates, and the contract prices for the given assets can become less attractive as the expiration date draws nearer.
• Leverage issues: Futures are leveraged instruments, and high leverage can lead to rapid fluctuations in futures prices.
• No control over future events: You don’t have any control over future events, such as natural disasters, unexpected weather conditions, political issues, etc., which can completely disrupt the market. This exposes you to risks.

Relevant article

An option for futures trading strategies is ETF trading strategies. Normally, these two types of trading vehicles track the same asset but they are somewhat different:

• ETFs Vs. Futures: What Should You Trade – What’s The Difference?

Profitable futures trading strategies

There are different strategies you can use to trade futures; some of the strategies are specific to the futures market but others are general strategies that can be used in any financial market.

General strategies for trading futures

These include the following:

• Trend-following strategies: These strategies try to exploit the potential of the price to continue moving in its trend direction. With these strategies, you trade in the direction of the trend, trying to capture the big impulse swings.
• Momentum strategies: With these strategies, you take a position when there is an accelerating movement in some direction, especially after a breakout of a price pattern. An example is Range expansion when you get a fast and strong movement during a day or period that is much larger than what is normal and you buy into the movement.
• Mean-reversion strategies: These strategies are based on the time series concept of central tendency. That is, the price tends to revert to that average anytime it moves significantly away from it. You can use indicators that show the average price and the overbought/oversold conditions, such as the Bollinger Bands, RSI, and so on, to trade this strategy. You take long positions when the price is oversold and go short when the price is overbought.

Futures-specific trading strategies

These are some strategies that are unique to futures trading:

• Bull Calendar Spread: This strategy aims to buy and sell futures contracts of the same underlying asset but with different expirations. Here, you take a long position on the near-term expiry and a short position on the long-term expiry. The reason is that the spread is expected to widen in favor of the long so you end up in profit.
• Bear Calendar Spread: This is just the opposite of the bull calendar spread. The idea is to take a short position on the short-term contract and a long position on the long-term contract because it is expected that the spread would widen in favor of the short so you end up in profit.

What is the most profitable futures trading strategy?

It is impossible to say the most profitable futures trading strategy, as different strategies work best in different markets. The most important thing is to find out whether a strategy has a verifiable statistical trading edge with positive expectancy in the market you want to trade. The only way to verify this is to backtest the strategy to know how it performs on past price data.

• Why A Backtest Works

What are the most profitable futures to trade?

You can’t possibly know that until you have traded all the available futures or at least back-tested your strategies on all of them. However, from our experience, commodities are very hard to trade. Stocks and index futures are a lot easier to trade than commodities.

Below we present a mixed bag of potential futures trading strategies. About 95% of the backtests on this website are tested on ETFs. It could be SPY, XLP, USO, TLT, for example.

However, as a rule of thumb, the difference between a futures backtest and ETF backtest should be minimal in liquid assets (but we recommend to backtest on each contract no matter what to find the best settings and trading rules).

Below are examples of potential futures trading strategies:

• Lower highs and lower lows pattern (trading strategy)
• The high and low divergence day trading strategy
• Volatility trading strategies – trade and make money on volatile markets (backtest)
• RSI QQQ (RSI mean reversion trading strategy QQQ)
• Monthly seasonalities in long-term Treasuries
• When XLP diverges from recent high and low: A mean-reversion trading strategy
• December seasonality in OBX (Oslo Stock Exchange)
• Trend-following system/strategy in gold (12-month moving average)
• Short selling strategies – is it possible to make money by shorting?

• Shorting oil when the dollar rises

• The Friday Seasonality in USO (oil)

All the strategies are taken from our main page on this website where we have free and profitable trading strategies.

FAQ:

Can retail traders trade futures, and what are the advantages of doing so?

Yes, retail traders can trade futures. The advantages include the ability to trade on margin, access deep liquidity, avoid overnight funding charges separately, and the flexibility to go long or short. Futures also offer diversification opportunities and can be used to hedge existing positions.

How do futures trading strategies differ from ETF trading strategies, and can the same strategies be applied to both?

Futures and ETF trading strategies have similarities, but differences exist in their underlying instruments. While they may track the same asset, futures are unique contracts, and strategies should be adapted accordingly. Backtesting on each contract helps refine and optimize strategies for specific market conditions.

What are some tax benefits associated with futures trading compared to other short-term trading markets?

Futures trading can offer tax benefits, as profitable trades are taxed on a 60/40 basis. Sixty percent of profits are taxed as long-term capital gains, and 40% as ordinary income. This contrasts with stock trading, where profits on stocks held less than a year are taxed 100% as ordinary income.