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Futures Trading Strategies That Optimize Risk vs Reward

, , | March 8, 2024 | By

No matter what your goals and resources are, having a structured approach to market entry, exit, and risk management is a necessity. Without this type of plan, the vast majority of futures trading strategies will fall short of their potential.

In reality, active traders have thousands of strategies at their disposal. The best ones are designed to identify trades that have an above-average probability of success, a fully defined risk, and potentially lucrative reward. Let’s take a look at several futures trading strategies that align risk to reward in a fashion that can produce consistently solid returns.

The Trend Is Your Friend

Trend trading is the discipline of entering a market in an attempt to capitalize on the momentum of a prolonged directional move in pricing. In futures, trend traders join a move by buying into bullish markets and selling bearish ones.

A trader may use both technical and fundamental analysis to identify, enter, and exit a trending market. Here are two examples of popular technical and fundamental strategies:

  • Fundamental: Fundamental traders address trends in regards to a market’s primary underpinnings. They evaluate economic events, breaking news items, and seasonal tendencies with respect to asset pricing. Then they use these market drivers to project price moves and for market entry/exit.
  • Technical: Technical traders often use technical tools and indicators to measure and enter a trending market. One popular strategy is to buy or sell a pullback in price from a periodic high or low. Such tools as Fibonacci retracements or the relative strength index (RSI) can help identify a market entry point within an evolving bullish or bearish trend.

The beauty of trend futures trading strategies is that a period of strong pricing momentum can produce extraordinary gains. To capture large profits, trend traders often incorporate the functionality of trailing stop losses to limit downside risk while attempting to capture the bulk of a directional move.

Trading Reversals

In contrast to trend trading, the primary objective of reversal strategies is to determine the turning point of a market. Completing this task successfully hinges upon accurately predicting the exhaustion point of a prevailing trend.

The strength of a directional move in pricing depends on many factors and may be measured by both market technicals and fundamentals. Here are two futures trading strategies related to reversal trading:

  • Trendlines: From a technical standpoint, a trend is defined as being a series of higher periodic highs and lower periodic lows. When these price points are connected, a trendline is created. When the trendline is violated, the validity of the aggregate move becomes questionable and a reversal possible. A trader then enters a position at market that is the opposite of the prevailing trend.
  • Oscillators: Momentum oscillators are a popular technical approach to trend trading. Stochastics and MACD (moving average convergence divergence) indicators are two that illustrate when a market is becoming overbought or oversold. These tools compare evolving price action to a mean value: When market conditions become extreme, an entry signal is generated.

Trading reversals can be a tricky business — false signals are common, and risk is enhanced. However, when correctly executed, reversal strategies can produce robust profits because they provide premium market entry with respect to a brand-new trend.


A breakout is a swift, directional move in a security’s price. Breakouts frequently occur in the capital markets and may be fueled by news items, economic events, or the presence of key technical indicators.

When a market breaks out, it often does so after a period of tightened price action. Frequently referred to as compression or consolidation, small trading ranges and heavy volumes are two characteristics of a market in this condition. Subsequently, traders commonly view various candlestick chart patterns, such as flags and pennants, as being precursors to a breakout.

Similar to reversals, breakout strategies can provide an abundance of false signals. However, the upside to trading breakouts is limited risk. According to these strategies, price is expected to move directionally, quickly. If it fails to do so, a  trader should immediately deem the position a failure and exit with a small gain or loss.

Do Your Futures Trading Strategies Optimize Risk and Reward?

The key thing to remember about risk and reward is that you don’t have to pay a lot for a little! Strategies that assume large risks in an attempt to secure small rewards are long-term losers ― a trade’s payoff should justify its capital exposure.

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