This article on Trading Behavior Dynamics is the opinion of Optimus Futures.
Your success or failure as a futures trader could result from account size, level of experience, or intelligence. But, it’s also about matching a trading style to your trading behavior.
You can be trading alongside the best futures trader, but your results will vary substantially if you don’t have the same stomach for risk or the same conviction in the play.
That’s why it’s so essential you sit down and ask yourself a series of questions to figure out what style of futures trader you are.
Below we identify some of the most common types of traders and explain what it takes to trade the strategy. You may not fall into
Event-Driven/Catalyst
Futures are most volatile right after a catalyst hits the market. A catalyst can be a new piece of information that causes traders to react more aggressively.
For example, in February 2022, it was announced that Russia had invaded Ukraine. Immediately after, crude oil futures jumped to over $100 per barrel.
A catalyst trader would have seen the headline and bought crude oil futures because they believed it would cause prices to spike.
Each futures and commodities contract has its catalysts.
For example, if you trade E-Mini S&P 500 (ES), you want to know what catalysts can push it. Sometimes, it can be a big corporate earnings release from Apple, Microsoft, or Amazon.com.
Or it could be an economic event, like an FOMC announcement.
In the energy sector, it can be geopolitical news that causes supply disruptions. Or an inventory report from the Department of Energy.
The bottom line is catalyst traders don’t come into the trading day with an opinion on what they’ll be trading that day. Instead, they’ll let the news dictate what trades they take.
What kind of trading behavior do you need to be a futures catalyst trader?
- Be alert and focused. And that means putting in a lot of time in front of your screens. No one knows when a breaking news play will occur, but you have to be able to see and react to it.
- Fast thinkers. Catching the news is just part of the process. You then must decipher if it is bullish or bearish, how bullish or bearish the news is, and how you anticipate other traders reacting to it.
- Patient. Waiting for a play to happen isn’t easy. It’s easy to get sucked into other trades if you’re at your desk watching all the action. But the truth is, there might be only one or two catalyst plays in a given trading day, and if you miss them, then you should not “force” yourself to look for one.
Technical Traders
Some traders believe the only thing that matters is price action. So instead of trying to decipher the news, they’ll let the price action tell them whether it’s bullish or bearish.
These traders will focus on price trends and chart patterns to make their decisions.
There are two main types of technical traders: momentum and mean-reversion.
A momentum futures trader likes to identify and ride a trend. If the momentum is bullish, they’ll be buyers. If it’s bearish, they’ll be sellers.
A mean-reversion trader will take the opposite side of momentum. They may see the futures price spiking quickly but believe the move is too much and decide to short it. These types of traders are trying to sell the rip and buy the dip.
Of course, several technical indicators are available to help identify trends, areas of support and resistance, and potential breakouts (or breakouts). You don’t have to use them all. Most traders we have observed only use a handful.
What kind of trading behavior do you need to be a technical trader?
- Analytical. Someone who likes looking at charts and patterns. And enjoys studying price action and levels.
- Technical analysis is more art than science. However, it can help traders with structure. For example, picking detailed entries and exits based on support and resistance.
- Traders who struggle with developing rules. should start with trading basing decisions on strict technical analysis formations.
Macro-Driven Fundamentals
While catalyst traders react to the futures as the news hits the wires, a macro-driven trader will think long-term.
For example, early in 2022, the Federal Reserve Bank decided it would have to raise interest rates to slow down the economy from inflation.
In most cases, rising interest rates are bearish for stocks. A savvy trader understanding this could have placed a swing-trade short on ES futures to take advantage of the macro news.
A lot of commodity prices are driven by the forces of supply and demand. Understanding the dynamics of that picture can only help you make better trading decisions.
What kind of trading behavior do you need to be fundamentally driven?
- Curiosity. If you liked doing homework in school, then this style of trading can work for you.
- Longer-term focused. Significant trends take time to develop. Trading off macro-driven fundamentals means potentially being in a trade for weeks or even months. Utilizing options can be helpful with this strategy.
Bottom Line
Success at trading futures, options, and commodities is possible for a small minority of people. Therefore, finding a trading style that suits your personality and risk tolerance is best to improve your odds.
For example, if you’re at a 9-to-5 job and don’t have access to your trading platform, then trading breaking news plays is probably not going to work out for you.
That’s why it’s crucial to do an internal audit. And discover what type of futures trade you are.
Regardless, we have trading platforms for any style of trader.
You can check out our flagship platform here to receive a free demo.
If you’d like to learn more about how Optimus Futures can help you, click here to get started.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
