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Best Index Futures Trading Strategies for Beginners
Suppose you want to understand index futures contracts and become a successful trader. In that case, you’ll need to have a well-defined trading strategy that helps you keep your risk under control and avoid emotional trading.
In this article we’ll unpack how index futures trading works and what to know about it, then we’ll go on to discuss the common index futures trading strategies you need to know.
How index futures trading works
Index futures trading refers to buying or selling contracts that allow traders to speculate on the future price movements of a stock market index, such as the S&P 500 or the NASDAQ.
Investors cannot directly buy an index, which is listed on the NYSE but can gain exposure to them with different instruments. One of the most common ways investors gain exposure to specific indices is through future contracts.
Futures contracts are traded on exchanges, and the price of the contract is determined by supply and demand. Regardless of the market price on the expiration date, the buyer or seller must buy or sell the underlying asset at the predetermined price.
What to know about index futures trading
If you are considering investing in index futures trading, it is essential to have a good understanding of leverage, margin requirements, and liquidity, as these factors can significantly impact your potential profits and losses.
Leverage
Traders can control large positions with relatively small amounts of capital meaning, that a small move in the underlying index can result in significant gains or losses, as it amplifies both.
Margin requirements
A maintenance margin is the minimum of equity that an investor must maintain in the account while trading.
Liquidity
Because buyers and sellers are always present in the futures markets, market orders can be placed quickly. This ensures that prices do not fluctuate dramatically, especially for contracts nearing maturity. For a deeper understanding of how market orders work and how they impact price movements, check out this Market Depth article.
What are the most common index futures trading strategies?
To become a successful index futures trader, it is crucial to have a strong understanding of common trading strategies, as they can help you make informed decisions and maximize your profits while minimizing your risks. Below we discuss the key strategies you should know about:
Go long
This is one of the most basic strategies, which means buying a futures contract with the expectation that the price of the underlying index will rise.
Short futures
Another strategy is to go short, i.e., selling futures contracts with the expectation that the price of the underlying index will fall. Learn more about short selling.
Spread trading
Buying and selling two different futures contracts at the same time, with the goal of profiting from the price difference.
Scalping
This strategy involves taking advantage of small price movements in the market by buying and selling futures contracts quickly, to make a small profit on each trade. Indicators like the Parabolic SAR can be helpful for identifying potential entry and exit points during rapid trades.
Position trading
Taking a long-term view of the market and holding on to futures contracts for an extended period to profit from larger price movements.
Hedging
Index futures can also be used as a hedge against market risk, by taking an offsetting position in the futures market to offset potential losses in an existing portfolio.
Summary
As you can see, there are various index futures trading strategies, from leverage to hedging that are important to know when starting out as a day trader. And once you become familiar with these this will help you to make informed decisions whilst maximizing your profits.
How ONE-SIGNAL can improve index futures trading
ONE-SIGNAL is another strategy to trade futures with, as our signals use the S&P 500 as a reference index. Our strategy is simple and straightforward: one trade a day, sometimes even less, depending on the chosen subscription.
Usually, trades are entered at the NYSE opening bell and closed at the end of the NYSE trading day. Our signals indicate the direction of the trade, long or short, and a stop loss for risk management purposes. You can also use Buy Stop Orders to set automatic buying positions once a price level is breached. This enables traders to have a systematic trading approach.
Check out our offering to find out what makes ONE-SIGNAL different. Start trading now with ONE-SIGNAL, or get in touch with us to learn more about ONE-SIGNAL’S platform.
