Futures markets are traded on exchanges worldwide and offer investors the opportunity to speculate on the future price of a wide variety of commodities, including metals, energy products, agricultural products, currencies, and stock index futures.
If the futures market is up-trending, it means that prices are rising and, as a result, there may be opportunities for profits. To take advantage of an up-trending market, you must understand how futures markets work and the factors that can influence prices.
One way to profit from an up-trending futures market is to buy futures contracts and hold them until prices rise. This strategy is known as ‘going long’. When buying futures, it is essential to pay attention to the margin requirements of the exchange on which the contract is being traded. Margin is how much money you need to deposit to enter a position. For example, if the margin prerequisite for a particular contract is 10%, $10 must be deposited for every $100 worth of contracts purchased.
The advantage of going long on futures is that it allows traders to take a leveraged position in the market. Therefore, you can make profits from even a tiny move in prices.
A disadvantage of this strategy is that you will incur losses if prices fall. Therefore, it is essential to have a stop-loss to limit downside risk.
Another way to profit from an up-trending futures market is to sell futures contracts and repurchase them at a lower price. This strategy is known as ‘going short’.
When selling futures, it is again vital to pay attention to the margin requirements of the exchange.
Going short on futures benefits you in that you can make profits even if prices only fall slightly.
A disadvantage of this strategy is that you will incur losses if prices rise. Therefore, it is vital to have a stop-loss to limit downside risk as with a long position.
Use futures spreads
Futures spread trading is another way to profit from an up-trending market. Spreads involve buying one contract and selling another.
There are two types of futures spreads intra-commodity spreads and inter-commodity spreads.
Intra-commodity spreads involve trading two different contracts for the same commodity. For example, if you were to buy July crude oil futures and sell August crude oil futures.
Inter-commodity spreads involve trading two different contracts for different commodities. For example, if you were to buy July crude oil futures and sell July gold futures.
You can use spreads to take advantage of price differences between the two contracts or hedge against price movements in the underlying market. The advantage of spread trading is that it allows traders to take a position in the market without committing to a particular direction. The disadvantage of this strategy is that profits are limited to the difference between the two prices.
Options are another tool that you can use to profit from an up-trending market. Options give the holder the right, but not the duty, to buy or sell a primary asset at a definitive price on or before a specific date.
The two types of options are call options and put options. Call options give the holder the right to buy an asset at a specified price. Put options allow the trader to sell an asset at a specified price. You can use options to take a bullish or bearish position in the market, depending on which type of option is purchased.
The advantage of using options is that they provide flexibility and allow traders to take a position without committing large amounts of capital. A disadvantage of this strategy is that you will incur losses if the market doesn’t move in the desired direction.
Use futures contracts to hedge
Another way to profit from an up-trending market is to use futures contracts to hedge against downside risk. You can use these to hedge against price movements in the primary asset.
For example, if a trader is long on a stock, they could buy a put option to hedge against the fall in the stock price.
The advantage of using futures contracts to hedge is that it allows traders to protect their positions from adverse price movements. As a disadvantage, this strategy can limit upside potential if the market moves higher. Click here to trade futures with Saxo Bank.