How to have a good defensive strategy in futures trading?

Futures trading is a form of financial speculation that involves buying and selling contracts that represent the future delivery of an asset, such as a commodity, a currency, an index, or a stock. Futures traders aim to profit from the price movements of the underlying asset, without actually owning or delivering it.

However, futures trading also involves significant risks, as the price of the underlying asset can fluctuate unpredictably and rapidly. Therefore, futures traders may need to have a good defensive strategy in futures trading, to minimize their losses and protect their capital during times of market stress. A defensive strategy is a conservative method of portfolio allocation and management that focuses on reducing the risk of losing the principal.

Some of the steps that futures traders can take to have a good defensive strategy in futures trading are:

• Rebalance the portfolio: Rebalancing the portfolio means adjusting the weights of the assets in the portfolio to maintain the intended asset allocation and risk level. Futures traders can rebalance their portfolio by reducing their exposure to risky assets, such as growth stocks, and increasing their exposure to safer assets, such as high-quality short-term bonds or blue-chip stocks. Rebalancing the portfolio can help futures traders to reduce their volatility and preserve their capital.

• Diversify the portfolio: Diversifying the portfolio means spreading the investments across different assets, markets, or sectors, to reduce the overall risk and volatility of the portfolio. Futures traders can diversify their portfolio by trading a variety of futures contracts, such as commodities, currencies, indices, and stocks, that have low or negative correlations with each other. Diversifying the portfolio can help futures traders to avoid putting all their eggs in one basket and to benefit from different market conditions.

• Use stop-loss orders: A stop-loss order is a type of order that instructs the broker to sell a security at the market when it reaches a certain price, known as the stop price. A stop-loss order can help futures traders to exit a losing position automatically and prevent further losses. Futures traders can use stop-loss orders to limit their downside risk and to protect their profits.

• Hold cash and cash equivalents: Cash and cash equivalents are liquid assets that can be easily converted into cash, such as money market funds, treasury bills, or certificates of deposit. Cash and cash equivalents can help futures traders to have liquidity and flexibility in down markets, as they can use them to meet their margin requirements, to take advantage of new opportunities, or to wait for better market conditions.

These are some of the steps that futures traders can take to have a good defensive strategy in futures trading, but they are not the only ones. Futures traders should always do their own research and analysis, and follow the rules and practices of futures trading, such as regulation, membership, contracts, trading, and risk management. By doing so, they can enhance their trading efficiency and profitability.