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Trading Bullish Reversals: How to Buy Futures at the Market's Bottom

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No matter if you specialize in trading stocks, real estate, or artwork, you’ve certainly heard the phrase “buy low, sell high.” In futures, it is the inspiration for one of active trading’s favorite pastimes: buying market bottoms.

So what exactly does it mean to buy a bottom? As any book on how to buy futures will tell you, buying a market’s bottom is the act of identifying periodic pricing low and then opening a new long position. If successful, a trader can realize large profits given the premium trade location.

Of course, consistently buying market bottoms is a challenging task. Let’s take a look at a few ways that professional traders attempt to buy low and sell high.

Using Fundamentals to Buy Bottoms

Fundamental analysis is the art of determining a security’s intrinsic value by examining its key underpinnings. In stocks, balance sheet and income statement analysis give clues to a company’s health. For futures products, fundamental analysis is more about discerning price’s forthcoming path with respect to vital market drivers.

If you’re interested in learning how to buy futures within the context of a fundamental reversal strategy, spotting bullish market drivers is the name of the game. These elements are capable of shifting market sentiment 180 degrees:

  • Monetary policy: The policies of central banking authorities are primary drivers of volatility in currencies, commodities, and equities. Depending on the asset class, hawkish or dovish policy moves can draw bids to nearly any market.
  • Economic data: Scheduled economic data releases—such as the WASDE Report, GDP, and CPI—can influence asset prices in both the long and short terms.
  • Outliers: Any event that heightens uncertainty in the marketplace may be considered an economic outlier. Elections, military conflict, terrorist attacks, and pandemic viral outbreaks are a few examples.

It is important to remember that unique asset classes may react in very different ways to the same fundamental market driver. For instance, dovish monetary policy from the U.S. Federal Reserve (FED) is likely to spark a bullish rally in equities index futures such as the E-mini S&P 500.

However, the same dovish FED policy will also devalue the U.S. dollar, placing bearish pressure on USD Index futures. Ultimately, it is up to the trader to be aware of how timely fundamentals may or may not impact asset pricing.

Using Technicals to Buy Bottoms

Being a competent fundamental analyst requires experience, expertise, and a considerable amount of guesswork. On the other hand, technical analysis is the study of price action―nothing else. Because of its definitive nature, many traders view technical analysis as the best way to learn how to buy futures.

In reality, there are countless ways to identify a market’s periodic bottom using pricing charts and indicators. Often, the only limits to developing a technical reversal strategy lie within the trader’s imagination. Nonetheless, here are two tried-and-true ways of timing a reversal:

  • Candlestick patterns: Dojis, bullish engulfing patterns, and hammers are three popular indicators used to identify market bottoms.
  • Momentum oscillators: The Relative Strength Index (RSI) and stochastics are two examples of oscillators implemented to spot turning points in the market. In the case of RSI, price action is placed on a 0-100 scale. Values lower than 30 signal that a market is oversold and may be forming a bottom.

The beauty of using a technical perspective to answer the question of how to buy futures is the lack of nuance involved in decision-making. The conditions for a bullish reversal are either present or they are not; there’s no middle ground. If the reversal is not confirmed by one or more indicators, then the prevailing bearish trend is unlikely to shift course.

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