Going Long

One of the most commonly implemented trading strategies with futures, often employed as the foundation of commodity speculation, is going long. Going long refers to the act of taking positive outlooks on market movements – that is to say, buying futures contracts with a view to a future rise in price of both the underlying asset and the futures contract itself. By adopting only long positions, traders can filter out much of the investigation work necessary to find more complex positions, and it can be a great starting point for newbies, as well as an essential component to more diverse trading strategies. But how exactly do you identify long positions, and what are the factors that must be taken into account?

Positive Triggers

The toughest part about adopting a long strategy is identifying the possible opportunities for price growth. This is very much an issue that depends on the type of futures contracts you are trading – for example, identifying commodity prices that might be about to break through will have a totally different set of requirements to spotting specific shares. Regardless of the type of futures contract you are looking at, it is necessary to identify positive ‘triggers’, i.e. indicators that might suggest a future positive price outlook is rational.

Take, for example, an economic trigger. Suppose the UK government introduces a new relief for car manufacturers, payable per ton of steel, to encourage more new, environmentally friendly cars to be produced. This might be a trigger that could suggest going long on steel futures might be worthwhile. The demand for steel would likely rise as a result of such a policy, particularly over time as the move starts to take effect, thus buying steel futures at today’s prices could lead to a healthy profit in 6 months time.

An alternative trigger might be derived from technical analysis of price data. For example, FTSE futures, which will normally trade between set cycles of highs and lows may be showing that they are ready to break through previous highs without any obvious signs of price resistance. This again could be deemed to be an indicator that the future could look promising for the FTSE and the UK economy, thus going long might be worthwhile.

One of the key factors you need to bear in mind is the pricing component. The markets are not stupid, and by virtue of the way in which they operate it is possible that the positive factors you are identifying have already been priced in to the value of the futures you’re looking to buy. If this is the case, it’s best to stay away, or to at least resign yourself to the likelihood that you will take a lesser profit from the deal – this can be identified through technical analysis in the first instance, but over time you will develop a nose for identifying when futures are ambitiously priced.

The opposite is also true – often the futures market will slightly lag behind the market for the underlying asset, presenting an ultra-short window of opportunity to capitalise on the irrational pricing. Again, this all depends on your ability to spot the opportunity, which will develop with experience and a growing exposure to the behaviour of the markets.

Going long is a comparatively straightforward strategy to get your head around when trading futures, but that doesn’t necessarily mean it’s easy to make money. Many traders try and spectacularly fail to make money buying into futures contracts – as they’ve learned the hard way, it’s not just about buying futures, but rather about making the right buying decisions and choosing your picks wisely.

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