Relative Value Futures Trading - Getting Started

For those who are not familiar with the term, “futures” is a financial contract that obligates the buyer to purchase an underlying asset from the seller at a predetermined price and date. Futures contracts can be traded with different approaches, but the two most common types are “outright futures” and “relative value futures.”

We'll take a look at the basics of each type of futures trading strategy and discuss their pros and cons. We'll also provide you with some tips on how to choose which type of futures contract is best for you. So let's get started!

Outright Futures Trading vs. Relative Value Futures Trading

As the name indicates, a futures agreement represents a finance instrument where the parties to the contract agree on transacting the same assets at a fixed price at a later date. Although futures contracts that trade in the futures market allow investors to deliver assets, they are not intended to provide physical delivery but instead used as a way to speculate on security prices and hedge risk. Traders can speculate about many commodities in the futures markets. Among the major futures markets are stocks, energy currencies, cryptocurrency rates, interest rates, grain trees or cattle, and other financial instruments. All of the major trading platforms will allow you to deploy this trading strategy in your futures account. Initial margin will be dependent on your own brokerage account.

When most people think of Futures trading, they think of buying and selling futures contracts based on the direction of the underlying asset. This is called “outright” trading, and it's how most start trading futures. But this trading strategy can be a high-risk proposition for novice traders. However, there are other ways to trade Futures, and one of the most reliable strategies is relative value trading. In this blog post, we will discuss the benefits of relative value futures trading. We will discuss futures trading using stock index futures, interest rate futures, metals, and energy and then discuss how you can use this strategy to make money in any market condition!

Get started trading futures with little up-front investment.

The best way to learn to trade futures is by using a paper trading account. This allows you to practice without risking any money, and it is a great way to learn the ropes before diving in head first. There are many online brokers that offer free paper trading accounts, so there is no excuse not to try it out!

Make money in any market condition, whether the market is bullish or bearish.

In relative value futures trading, we are not concerned with the direction of the market. Traders should not look to buy, or sell but instead look at the relative difference between two (or more) futures. We are only interested in the difference between two assets. This means that we can make money in any market condition, whether the market is bullish or bearish. So, regardless of market conditions, we can always find opportunities to make money trading Futures!

Benefit from experienced traders who will help you make the most of your trades!

When you trade with experienced traders, they can help you make money in any market condition. Experienced futures traders are not scared when a financial instrument trades volatile, which means they can help you make money even when the market is going up or down!

Use relative value futures trading for a more intelligent, profitable approach to futures trading

When you bet on the direction of a futures contract that is called “outright” trading, and it can be very risky for novice traders. However, there is another way to trade Futures, and this is called “relative value” trading. In this type of trading, we are not concerned with the direction of the market. We are only interested in the difference between two assets. This means that we can make money in any market condition, whether the market is bullish or bearish. So, regardless of market conditions, we can always find opportunities to make money in the futures market!

This type of trading is more relaxing than outright trading because we are not worried about the direction of the market when we buy or sell. We can simply focus on finding statistical anomalies when highly correlated relationships break down. This makes for a more relaxed and profitable approach to Futures trading!

What are some examples of highly correlated futures contracts?

Examples of a highly correlated futures contract include the S&P 500 Index Futures , the Dow Jones Industrial Average Futures , and the Nasdaq 100 Futures. These are all based on stock indices and thus move in relation to the underlying stocks.

Traders use a futures contract in the US Interest Rate Futures (Bond Futures) to find correlated relationships along the US Yield Curve. When correlated relationships break down, traders have the potential to profit from this disconnect. The same thing can be done analyzing the term structure of Oil Futures, or Commodity futures

What are some examples of non-correlated futures contracts?

Examples of non-correlated futures contracts include the Crude Oil Futures contract and the Gold Futures. These market moves do not move in relation to other assets, but rather fluctuate based on their own underlying factors. Over time it may appear to show correlation, but products without a historical close relationship are not the best choices for relative value futures trade.

How can investors use highly correlated futures contracts?

Investors can use highly correlated futures contracts to hedge against price movements in the underlying asset. For example, if an investor owns shares of the S&P 500 index, they could purchase a S&P 500 index futures contract to hedge against a decline in the stock market. If a futures trader own a sizable position in stocks that are closely correlated to Oil Futures, that trader has the option to trade oil futures to protect (or hedge) their stock exposure.

What are some risks associated with investing in highly correlated futures contracts?

Some risks associated with trading futures in highly correlated futures products include counterparty risk and basis risk. Counterparty risk is the risk that the other party to the contract will not fulfill their obligations under the contract. This is dealt with through your brokerage account. Basis risk is the risk that the price of the underlying asset (or underlying commodity) will move differently than expected, leading to losses for the futures trade. The other risks include correlation breakdowns, and changes in margin that might affect how long you're able to hold a futures position. Traders may need to sell futures contracts if they get a margin call.

The Relative value Future Trade is a scalable approach to trading highly correlated Futures markets.

If you want to improve your futures trade skills and achieve success in the futures market, join Masters in Trading Community. We offer live classes, trade ideas, and analysis from top professionals. Most importantly, we offer a supportive community to help you reach your trading goals.