The key to trading success lies, in addition to having the necessary right mental attitude, in finding a trading strategy that suits your own personality. With a futures trading strategy, you should be able to keep risks under control, i.e., strictly limit losses and let profits run according to the rules.
With a well-defined trading strategy that you understand in and out, you will probably do better than with a “black box system” of highly complex indicators and signals.
Today, we want to look at some profitable trading strategies for futures trading. First, however, we will take a look at what a trading strategy looks like and how it works.
Trading Strategy Advantages for Prop Futures Traders
At the level of an individual trade, its outcome is entirely random, regardless of the market, time, and trading instrument being considered. Only with a sufficiently large number of very similar trades can the results possibly be predicted according to the “law of large numbers.”
This is because factors such as luck, bad luck, and chance can be statistically eliminated through many comparable trades.
Therefore, systematic trading strategies can increase the probability of success and profit for an investor.
Characteristics of a Systematic Trading Strategy
A trading system consists of the following components:
A Measurable Advantage
For a trading strategy to even deserve this name, there must be a clear, measurable profit advantage that is statistically significant. Whether such an advantage exists can be ensured through backtesting, i.e., retrospective consideration of a sufficient number of examples, or through an existing track record, i.e., clearly proven and confirmed successes.
Trade Entry, Profit Target, and Stop Definition
All details of the strategy must be clear and well-defined. It must be clear in which market you trade, which chart you use, which time frame, which indicators you use, when you enter, and where profit targets and stop levels are.
Money Management
Money management primarily involves risk issues. For a prop trader in the futures market, it’s important to have a proper position size where the risk is in good balance relative to the capital.
- How large is a position size (how many futures contracts)
- What determines its size (defined by prop firm rules and your risk-appetite)
- How high is the maximum risk in relation to the capital (either defined by rules of the prop firm or your own evaluation)
- What happens if a losing streak occurs (do you reduce the number of trade futures contracts?)
Position Management
Position management refers to the management of existing trading positions. So, if you are long on a future contract, you need to manage your long position. In contrast, if you are short, you need to manage your short position.
You’ll consider taking partial profits, trailing the stop, leaving the stop at the entry-level nouveau, etc.
For prop traders, it’s also highly important to consider closing positions before economic data releases because most prop firms prohibit holding positions during news events.
Simple and Easy-to-Understand Rules
A good trading system always tells you exactly what to do as a futures trader. This means that you do not have to make any spontaneous decisions after entering a trade.
The great benefit is that this eliminates emotions, as there is a clear and strictly defined mechanical rule for every potential price movement in the underlying asset you trade.
If you manage to stick to these rules, then with a profitable trading strategy, you always have a measurable, positive profit expectation in the long run.
This makes you superior to traders who do not follow a clear trading system and are tempted or forced by the market to make decisions.
You, as the knowledgeable and well-prepared strategic trader, know what to do at all times during trading.
Trend Following Strategy Moving Averages
A good trading strategy doesn’t have to be complicated, and sometimes, it’s the simple strategy that works most reliably. A very simple trading strategy can be based on moving averages, either by using the simple moving average (MA) or exponential moving average (EMA).
A moving average is calculated from the average price of the past n time periods. A time period can be, for example, a minute, an hour, a day, or a week, depending on whether a minute, hourly, daily, or weekly chart is being considered.
A moving average allows a smoothing of the price trend, i.e., the short-term fluctuations can be filtered out.
If you use a regular moving average, all periods (n) are weighted the same. So, if you use a 20 MA, the value will be determined by taking the average of the last 20 periods weighted equally.
If you use an exponential moving average, the last periods will have an exponentially higher weight in the average calculation. That means they move faster with the price than regular moving averages do.
Intersection Points as Entry and Exit Signals
A common trend-following strategy is, for example, to open a long position when a simple moving average with a shorter period crosses a higher period moving average from bottom to top.
Let’s say you have a 20-day moving average (20 MA), and it crosses the longer-term 200-day moving average (200 MA) from bottom to top.
This could then be interpreted as a buy signal for opening new long positions or as a closing signal for short positions.
Conversely, the long position can be closed or a short position newly entered when the 20 MA line crosses the 200 MA line from top to bottom. This strategy works especially well in market phases with strong trends, while it often fails in sideway markets.
Fibonacci Based Trading Strategy
The Italian mathematician Leonardo Fibonacci da Pisa, who lived from 1170 to 1240, described the growth of a rabbit population with a number sequence at the beginning of the 13th century. The determination of these so-called Fibonacci numbers is relatively simple.
For the first two values, 1 is given.
Then, two adjacent numbers are always added together.
The sequence is thus 1, 1, 2 (1+1), 3 (1+2), 5 (2 + 3), 8 (3 + 5), etc.
The quotients of two consecutive Fibonacci numbers approach the so-called Golden Ratio of 1.618 (or inversely 0.618) more and more. In nature, the ratio of the Golden Ratio occurs many times, whether in the structure of crystals, in planetary orbits, or in length ratios in the human body.
Once you play around with Fibonacci levels, you’ll likely be positively surprised by how accurate they are and how often they are.
Fibonacci Ratios in Trading: Retracements and Extensions
Since the financial markets also have a mathematical basis, price movements often reflect Fibonacci ratios. In addition to the Golden Ratio (1.618), this includes other relationships of the Fibonacci numbers to each other, which traders refer to as Fibonacci levels.
Important for trading are: 0; 23.6%, 38.2%; 50%, 61.8%; 76.4%, 100%, 127.2%, 138.2%, 161.8%, and 200%.
For percentage values below 100%, we speak of Fibonacci retracements in technical analysis. On the other hand, everything above 100% is the Fibonacci extension.
Retracements are often used to evaluate a good entry-level for opening a new position, while extensions are often used to evaluate potential profit targets to exit the trade.
