Trading Futures For The Long Term

Futures contracts are an increasingly popular investment tool, allowing traders to speculate today on future asset prices through creating an obligation to settle on a given date and at a given price. As instruments, futures are highly leveraged to deliver more significant returns to traders, although they also present risks and difficulties for traders in challenging market conditions. One way in which these challenges can be in part overcome is through adopting a more long-term outlook to futures trading, as a means of trading futures through the short-term fluctuations that can pose problems for those with more instant trading styles.

While trading futures for the long-term is naturally difficult, both as a result of a fixed expiry date and the costs involved in financing leveraged positions for lengthy periods, holding on to your futures can be a solid way of avoiding the short-term turmoil of the markets, and provided you have the patience and nerve to see your futures contracts through, the value in doing so can be significant.

Trading futures over the longer-term requires a strategic approach to identifying viable investments and deciding how to respond to given trading circumstances. Whether it’s picking and holding on the strength of economic data, or trading with the general trend of pricing, there are a number of strategies traders deploy when dealing in futures contracts with a longer-term outlook.

Macro-Trading

One of the key areas of interest for longer-term trading is what is known as macro trading. Macro refers to trading single instruments off the back of wider, more universal triggers – usually the economy and world affairs. Macro traders look at the bigger picture, to try to identify trends that are likely to develop over the longer investment term, and in doing so locate stocks, commodities and indices that are likely to respond in a particular way to those trends – either going long, short, or on the basis of a constant fluctuation in prices.

Part of macro trading relies on an understanding of foundational economics. Before you dash off to buy a copy of Adam Smith’s seminal writings on the subject, it’s important that you appreciate that economics on a very basic level is simple, common sense. If it’s harder for the UK to get access to oil as a result of supply shortages, oil prices will rise. If unemployment levels fall, retailers will see an increase in sales, because people have more money to spend. While economics can be extrapolated into a tremendously difficult subject area, knowing the fundamentals of how every economic indicator will impact underlying asset prices (through the process of making logical connections as above), is enough to see most macro-traders through their early stages as they become more familiar and more accomplished at trading futures contracts.

Buy and Hold

Of course, one option that’s always present with futures trading is the ability to buy and hold futures contracts until they are settled. With many traders concerning themselves with speculating on the price of the instrument alone, it can be easy to forget that futures contracts are more than just academic – they are tangible investment products that legally compel action on a set date. As a result, futures contracts often lose their value in the run up to their maturity, as the value of locking in the futures price diminishes.

However, one strategy that can be deployed effectively in futures trading is to buy and hold your positions until they mature, allowing traders the full scope of gains to be realised from the duration of their trade. While trading in this sense requires a firm grasp of the calculations necessary to factor in financing and commission costs, it is nevertheless possible as a means of eradicating the often split-second decision making demands that can result in recklessness. That’s not to say that you should remain rigidly fixed in the face of adversity, but as a blueprint for longer-term trading, starting off with the outlook that winning trades should be seen to their conclusion can be a highly effective strategy, allowing you to capitalise on the positive positions to their fullest extent.

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