4 Major Ways to Trade Futures, Newbies Should Read This

The futures market may seem complex, but there are actually 4 core strategies. Whether you want to profit from rises and falls, hedge risks, or exploit market loopholes, there is always one that suits you. The key is to choose according to your own risk tolerance.

1. Long Position

In simple terms, it is betting that the price will rise. Buy futures contracts, wait for the price to be higher at expiration, and then sell to profit from the difference.

Real Example: Suppose you are optimistic about crude oil and predict it will rise to $80 per barrel. If you buy in at $70 and it indeed rises to $80 at expiration, you make a profit of $10 per barrel.

There is also an advanced strategy called “breakthrough trading” here - decisively entering when the price breaks through historical support or resistance levels, which usually indicates that there will be continued rise afterwards.

Risk? Leverage is a double-edged sword; when the price falls, you lose quickly. That's why smart people set stop-loss orders to automatically cut their positions to save themselves.

2. Short Position

On the other hand, betting that the price will fall. Sell the contract, wait for the price to drop and buy it back at a lower price, earning the difference in between.

Actual Example: A trader is bearish on corn, predicting that a bumper harvest will depress prices. They sell at $6/bushel and buy back at $5, making a profit of $1/bushel.

The maximum risk of this strategy is that the price could theoretically rise infinitely, so losses could also be unlimited. A stop loss must be set.

3. Spread Trading

This is an advanced strategy: to long and short two related assets simultaneously, profiting only from the price difference between the two, thereby avoiding directional risk.

Common Forms:

Crack Spread: Buy heating oil, sell crude oil. If heating oil rises quickly (high demand in winter) while crude oil remains flat, the spread widens, and you make a profit.

Calendar Spread: Contracts for the same asset in different months. For example, buying July wheat and selling December wheat, betting that the near month will rise more.

This type of play requires a high sensitivity to the market—one must understand details such as seasonality and supply changes.

4. Arbitrage

The gameplay with the lowest risk requires the fastest hands and the best tools.

Principle: The same contract has slight price differences across different exchanges. Buy in the cheaper place and sell in the expensive place to lock in the price difference.

Example: Gold futures are quoted at $1500 on Exchange A and $1505 on Exchange B. You buy from A and sell at B in a second, earning $5.

It seems invincible, but where's the pitfall? It requires a high-frequency trading system, massive funds, and an extremely fast network. A delay of a millisecond means the opportunity is gone.

Summary

Four strategies, each with its focus: going long/short is a unilateral bet, high risk but high return; spread trading balances risk and reward; arbitrage has low risk but high thresholds.

Which one to choose? The core is to ask yourself three questions:

1. Am I confident about the market direction?
2. How much loss can I bear?
3. How fast is my reaction speed?

The answer determines which weapon you should use.