Five strategies for trading futures in the UK

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Unregulated trading in futures is a relatively new concept to the UK. In 2015, the FCA permitted CME Group and Eris Exchange to provide contracts for differences (CFDs) on Bitcoin, meaning that London was one of the few places in the world where investors could trade Bitcoin-related products from regulated exchanges. However, due to insufficient consumer protection measures, stricter regulation has been put into place since April 2018 regarding these kinds of investments.

Here are five strategies for trading futures in the UK.

Strategy 1: Arbitrage (Pairs trade)

The most straightforward strategy, arbitrage, is where you spot an imbalance in prices between two markets, buy low on one market and sell high on another. At its most basic level, pairs trading can be defined as: “the simultaneous purchase and sale of a cash market instrument and the purchase and sale (usually with the use of a derivative) of another related instrument to take advantage of small price differentials between the cash and the derivative markets.”

Strategy 2: Trend following

Trend following is where you try to benefit from long-term price movement (trend) by buying when prices are trending upwards, selling when prices are trending downwards.” In general, trend followers trade using a basic methodology that differs from those typically employed by most investors.

A common approach employed by many traders is to attempt to identify support and resistance levels in charts. Such methods often produce high-frequency trading signals – but fail utterly as price trends change direction. Trend followers have been around since the 1940s but also began gaining significant traction in the 1970s. The Turtle Trading experiment was a significant reason for this increase in popularity among traders worldwide and was instrumental in making John W. Henry is a household name.

Strategy 3: Day trading

Day trading is where you buy and sell the same asset on the same day. You can make a lot of money by buying and selling quickly.

In contrast to position traders who hold onto assets for long periods, day traders seek to capitalize on short-term changes in asset prices; they have their positions for a maximum of one day (hence “day trading”). The goal is to capture gains resulting from intra-day fluctuations or market ‘inefficiencies’ – taking advantage of the bid-ask spread as well as large price movements. Because margin accounts are used, profits or losses can exceed those from simply holding an overnight long or short position in the underlying asset. Day trading is a risky business – even the most experienced traders will only manage to close out a day trade in around 70% of all attempts.

Strategy 4: Arbitrage (Forex AR)

This is similar to Forex arbitrage, but you buy one currency while going short another instead of taking advantage of temporary dislocations between two different forex pairs. For example, if the GBP/USD exchange rate was trading at 1.7000 and the USD/JPY was at 101.00, a trader might be able to capture a small profit by selling the USD/JPY pair short while simultaneously buying more USD from their bank with their borrowed Yen.

In general, Forex arbitrage opportunities arise when there are temporary price dislocations between the different pairs in the forex market. There is no specific rule for capturing such arbitrage opportunities, but there are some strategies that traders typically use. The first is to look broadly across all currency pairs within a market or time frame to spot mispricings.

Strategy 5: Intra-market spread trading (e.g. S&P500 E-mini)

This strategy captures intra-market spreads in equity index futures markets, i.e. buying one mini contract and selling another at a slightly higher price. This strategy does not require any knowledge of price forecasting – it is executed solely on historical data and derivatives pricing relationships between markets with different expiries. Trading futures contracts can generate consistent, high returns with liquid markets and tight bid-ask spreads.