Top 5 Futures Trading Strategies to Know in 2024 - 2025

Of late, the derivatives trading segment has seen a significant spike in trading volumes due to the influx of a large number of retail traders. The derivatives segment is made up of two sub-segments - Futures and Options. 

In this article, we are going to focus on the futures sub-segment and look at some of the top futures trading strategies that you need to know and implement to increase your chances of success.      

What are Futures Contracts? 

A futures contract is an agreement between two parties, where one party agrees to purchase a particular asset, called the underlying asset, for a specific price at a future date. The other party to the contract, meanwhile, agrees to sell the underlying asset for that same price on that particular future date.  

Futures are also known as derivative contracts since they essentially ‘derive’ their value from the value of their underlying asset. For example, if the underlying asset rises in value, its futures contract will also rise in value, and vice versa. The underlying asset for a futures contract can be any financial instrument ranging from stocks and market indices to commodities and currencies.

Futures contracts that are traded on formal exchanges are standardised agreements. This essentially means that the terms of the agreement such as the contract expiration date and the lot size are fixed by the exchanges and cannot be modified by either party to the contract. Such standardisation of contracts by the exchange makes trading easier and more efficient.     

How Do Futures Contracts Work? 

Before we take a look at some of the top futures trading strategies, let us quickly try to understand how these derivative contracts work. Futures contracts have limited validity, meaning they expire after a set period. 

When you purchase a futures contract, you agree to buy the underlying asset at the predetermined price on a future date. This future date is almost always the contract expiration date. On the contrary, when you sell a futures contract, you essentially agree to sell the underlying asset at the predetermined price on a future date. 

On the expiration date, the buyer must pay the agreed amount to the seller and take delivery of the underlying asset. The seller, on the other hand, must deliver the agreed-upon quantity of the asset to the buyer. Alternatively, the buyer or the seller of the futures contract may choose to square off their positions prematurely if they do not want to follow through with their end of the obligation.    

Top 5 Futures Trading Strategies to Know in 2024 - 2025

While it is now clear how futures trading works, here are some of the best strategies you can use in futures trading.

• Spread Trading Strategy

Spread trading strategy involves simultaneously buying and selling futures contracts of the same asset with different expiration dates. Some traders may choose to buy and sell futures contracts of different, but closely related assets, with the same expiration dates as well. Simultaneously purchasing and selling futures contracts allows you to effectively capitalise on the price differential between them by taking offsetting positions.

Here’s a hypothetical example to help you understand how a spread trading futures strategy works. 

Crude oil and natural gas prices have historically exhibited a very strong correlation, making them closely related assets. However, due to supply-demand dynamics, there may be periods where the prices of these two assets may diverge temporarily. During such instances, you can utilise spread trading to capitalise on this price divergence. 

Now, let us assume that the price of crude oil has surged due to geo-political tensions in oil-producing regions. This would also lead to an increase in the price of crude oil futures. However, the price of natural gas has remained stable throughout due to strong supply and favourable market conditions. 

With a spread trading futures strategy, you can capitalise on this price disparity between these two closely related assets. You could buy crude oil futures contracts and sell natural gas futures contracts (both with the same contract expiration date). If natural gas prices catch up to crude oil prices, the spread between the two commodities will narrow, at which point both contracts can be squared off to realise a profit.   

• Breakout Trading Strategy 

Breakout trading is one of the more common futures trading strategies many traders use. It involves identifying key support and resistance levels for an asset. Once these levels are identified, traders take up appropriate positions when the prices break out of these levels. If the asset breaks out of its support level, a short position is initiated and if it breaks out of its resistance level, a long position is initiated.   

Here is a hypothetical example to help you understand how this particular futures strategy works. 

Let us take the case of a large-cap company. The stock has been trading within a particular range for a long time, showing no signs of a clear trend. As a trader, you wait until the stock breaks out of its range to initiate a position. The selling pressure in the stock steadily increases, due to which the nearest support level is broken. 

At this point, you can sell the stock’s futures contracts on the exchanges. This will allow you to profit from the falling prices. Once your profit target has been achieved, you can close out your short futures position by buying back the stock’s futures contracts.  

• Mean Reversion Trading Strategy 

The mean reversion trading strategy is a unique futures strategy that relies on the concept that asset prices tend to revert to their average prices over time, irrespective of how they move. Traders using this strategy take an appropriate futures position when the price of an asset deviates significantly from its historical average, anticipating a return to the mean.  

Let us look at a hypothetical example to understand the mean reversion trading strategy better.  

Assume the broad-market index - Nifty 50 - deviates from its historical average due to uncertain economic conditions and sub-par quarterly results. You confirm this deviation by comparing the index value to its 50-day EMA and Relative Strength Index (RSI), which indicates that the index is in the oversold region (below 30). 

Expecting a reversion of the index value to its historical mean, you enter into a long position by purchasing the Nifty 50 futures contract. As expected, the index value moves up, leading to an increase in the price of its futures contract. Once the price moves up enough to satisfy your profit target, you square off your position by selling the futures contract.     

• Pullback Trading Strategy 

Pullback trading strategy is another one of the more commonly used futures trading strategies. The logic behind this strategy is that during an ongoing trend, the price of assets generally tends to temporarily go against the prevailing trend before resuming its original direction. The points where the asset prices retrace or go against the trend are referred to as pullback points. Traders can use these pullbacks to enter into appropriate positions.

Here is a hypothetical example to help you understand how the pullback trading strategy works in the futures market. 

Let us assume that the silver futures contract is on an uptrend due to a consistent increase in the demand for silver. Despite being on a clear uptrend, the prices fall temporarily due to profit booking by traders of silver futures. This is a classic example of a pullback. 

Now that you have identified the pullback, you can enter into a short position by selling silver futures contracts. As the prices continue to fall, your position will increase in value, fetching you profits. Once your profit target is reached, you can square off your position by buying back the futures contract. 

You can also go a step further and even enter into a long position by purchasing silver futures once the asset’s price resumes its direction with the prevailing trend. This will allow you to maximise your profit potential.                    

• Contrarian Trading Strategy 

Contrarian trading is a unique futures trading strategy that goes against the prevailing market sentiment. Traders who use this strategy do not follow the trend. Instead, they take up positions that actively go against the trend in anticipation of cashing in on an impending trend reversal. 

Let us take up a hypothetical example to understand how a contrarian trading strategy works in the futures market.

Assume there is a mid-cap stock. Due to a lapse in regulatory and compliance measures, the stock’s price falls significantly. Although the lapse was minor and could be rectified, the market overreacted with extreme pessimism driving the price down sharply. 

Instead of taking up a short position on the stock’s futures contract, you adopt a contrarian approach. You enter into a long position by purchasing its futures contract anticipating a reversal in the trend. As you expected, the reversal happens and the stock goes on an uptrend, leading to a rise in your position’s value. Once your profit target is achieved, you can square off your long position by selling the futures contract on the exchange.    

Conclusion 

With this, you must now be aware of the top 5 futures trading strategies you can use in 2024 - 2025. Now, it is essential to note that the strategies mentioned above are only illustrative and not exhaustive. There are several other strategies that traders use to profit from the short-term price movements of assets. 

Also, using strong risk management measures when trading in these derivative contracts is crucial considering that the futures market carries more risk compared to the spot market. By setting strict stop-loss orders and limiting position sizes, you can effectively mitigate downside risk due to unexpected market movements.

The Research 360 platform powered by Motilal Oswal can help you supercharge your futures trading journey. You can get a host of useful information designed for derivative trading, such as heatmaps, open interest (OI), derivative contracts build-up, most active contracts and Market Wide Position Limits (MWPLs) and contract rollover information for all F&O stocks. 

Using the various insights provided by the platform, you can make informed trading decisions that are in line with your goals and risk tolerance levels. Sign up for Research 360 today and enjoy all of these derivatives-focused features and more for free.