How to Use Futures Trading Strategies

Before making any investments, no matter what the investment vehicle, a person should know the market and understand how to use certain trading strategies to possibly turn a profit. Futures' trading is no exception, and a person should use caution when trading. There are certain trading strategies that have proven themselves over the long-term, but an investor still must understand the underlying investment and not just the strategy.

Step 1 : Go long on a futures contract. Going long is just trading verbiage for buying a futures contract and then holding it on the expectation that the price will rise. Then, you can sell the future at a profit.

Step 2 : Trade futures contracts on margin. This is where you borrow the money from a trading company and then use that money or credit to buy futures contracts. Generally, the trading will require that you deposit a percentage of the margin to secure the loan. The percentage by law has to be 50% or more. This is risky because the company can call the margin at anytime they choose, and you will be responsible for any deficit in trading price no matter the amount.

Step 3 : Use a spread strategy to trade futures contracts. This is where a trader can buy and sell futures contracts for the same commodity. For example, say there is a -05 price difference in the futures of pork belly contracts from one month to the next month. You expect the price to rise. You would then sell the current month's contract and buy the next months contract given that this expected rise in price makes the latter contract more profitable.

Step 4 : Utilize a butterfly-spread futures-trading strategy. In this example, you would buy a first-of-the-month contract, sell two middle-of-the-month contract and then buy an end-of-the-month futures contract.