Mastering NASDAQ Futures: Trading Strategies for Tech Indices

Welcome to our guide on mastering trading strategies for the NASDAQ futures contracts! Discover key strategies for trading Nasdaq futures and optimizing your portfolio’s performance. This guide provides expert tips and techniques for navigating the volatile tech stock market.

What are Nasdaq Futures?

Nasdaq futures comprise a couple of financial trading instruments that allow traders the opportunity to buy or sell contracts of the underlying index. That index is the tech-heavy Nasdaq 100. Nasdaq futures track the performance/price of this index.

Nasdaq futures are important because they can influence the price of the underlying index itself. And vice versa. Derivatives are tricky, but important to keep an eye on. Why?

Unlike equity indices, index futures trade 24 hours a day. When the NQ (symbol for the Nasdaq futures) opens trading at 5 pm on Sunday, it can indicate as to how the equity index will open the next morning at 9:30 am EST.

Because it trades differently and with a different schedule than the popular Nasdaq ETFs like the QQQ, it may require different trading strategies. With that in mind, let’s dive into the different trading strategies for Nasdaq futures. In this guide we’ll cover the following: 

• various trading strategies and techniques to help you navigate a volatile tech stock market
• insights and actionable tips to optimize your performance
• technical and fundamental analysis for NASDAQ futures trading
• the role of sentiment and market psychology

Key Benefits of Trading Nasdaq Futures

There are many benefits of trading Nasdaq futures, from available liquidity to hedging and speculation. Let’s examine a few key benefits before jumping into the strategies.

1. Liquidity: Because they are such a popular trading vehicle, Nasdaq futures are typically very liquid. This means they can be bought and sold rather quickly and with considerably sized orders. The more liquid a trading vehicle, the easier you can get in and out of the trade with a bigger size without slippage. Granted, this may change somewhat during certain trading times. So be sure to trade during optimal trading hours for futures.
   
   
2. 24-Hour Trading: Unlike equities and ETFs like the QQQ, Nasdaq futures trade around the clock. This can be a double-edged sword that allows for continuous trading, but also susceptibility to after-hours news and events. Of course, you might argue that news can come at any time, and being able to trade overnight could help you with risk management instead of falling prey to after-hours stock news without the ability to exit positions. And you’d have a good point!
   
   
3. Market Sentiment Gauge: As the Nasdaq futures trade round the clock, they are often used as a gauge for the traditional trading indices during after-hours trading. For example, if on Sunday night, futures are trading at a premium to the index level from the close on Friday, investors might be optimistic about the market opening on Monday. Or, if the futures are going in the opposite direction of their investments, they may use this as a hedge.
   
   
4. Hedging: As we just mentioned, investors will often use the futures markets as a means of hedging their longer-term position in stocks. If markets are poised to reverse, taking a contrarian position in futures can hedge against pullbacks in the equities markets. By taking a position with Nasdaq futures, investors may be able to offset losses in their portfolio.
   
   
5. Market Speculation: As with other markets and trading vehicles, Nasdaq futures can and are traded for speculative purposes. You can expect to be trading alongside hyper scalpers, algos, trend traders, and a myriad of other styles of traders. The great thing about trading the Nasdaq is the opportunities to trade with smaller capital than is normally required for other instruments.

What Are the Most Popular Tickers for NASDAQ Futures?

The two most popular tickers for trading the Nasdaq futures are carried on the Chicago Mercantile Exchange. These two symbols represent E-mini NASDAQ 100 Futures (NQ) and Micro E-mini NASDAQ 100 Futures (MNQ). Both are derivatives of the index itself and require lower capital contributions. 

What Are E-mini Nasdaq Futures?

E-mini Nasdaq Futures are probably the most common symbol of the two available tickers, NQ and MNQ. They are traded electronically on the Chicago Mercantile Exchange (CME). E-minis are a smaller version of the standard futures contract. They are 1/10th the size of a standard contract.

What Are Micro E-mini Nasdaq Futures?

Like its bigger brother, the E-mini Nasdaq Futures, Micro E-minis are an even smaller derivative for the underlying index asset. They are also traded electronically through the CME. However, they are much smaller, trading at 1/10th the size of the E-mini Nasdaq Futures contract, making the MNQ very accessible for lay traders. 

In other words, the NQ trades at $20 times the price of the Nasdaq 100 while the MNQ trades at $2 times the Nasdaq 100 index.

Key Differences Between Nasdaq Futures and Other Futures Contracts

Nasdaq futures, like the other index derivatives, share some differences from the broader futures market and its assets like commodities, metals, and currencies. Here are three key differences you can expect:

• The underlying asset for other futures contracts may offer the opportunity to own that asset at the expiration of the contract. Because index futures are a virtual product, you can only close out for the cash equivalent at the expiration date. With a commodity like oil or soybeans, you may elect to take delivery, which might be beneficial if you are a corporation trading in that industry.
  
  
• Contract sizes for Nasdaq futures can be quite different than other contracts, even within the index group. For example, the S&P 500 futures trade at $50 times the S&P 500 index, whereas one contract of Nasdaq 100 futures is $20 times the Nasdaq 100 index. The same is true for gold and other assets. Contract sizes may vary.
  
  
• The participants in the index futures space may differ drastically from those in other futures markets like commodities or energy. Often, you’ll find corporations participating in their corresponding industrial futures markets, like agriculture, energy, or commodities. The NQ may have fewer of those participants and more speculators and financial institutions looking to invest or hedge their tech investments.
  
  

Four Key Strategies for Trading Nasdaq Futures

There are a million different ways to skin a cat, so they say. Trading isn’t always as simple as following a single strategy, but it’s also not so complicated that you have to know them all. To that end, we’ve chosen the top four strategies you should know for trading Nasdaq futures. 

1. Trend Following:

Trend followers identify when new trends begin and end and try to capture the meat of that move. In a lot of ways, they’re like surfers searching for a new wave and then riding it until it fizzles out before they paddle back out to sea to catch the next one. Trend followers enter when the direction of the trend is confirmed with technical analysis and then exit when the trend reverses.

There are several criteria for determining that the trend is confirmed:

- Multiple moving averages are turning in the same direction, up or down, and the price action remains above or below depending on the desired trend.

- The general market is also following the same trend.

- Volume is increasing as price increases.

Example:

If the Nasdaq has been trending upward for some weeks and then pulls back on lower volume, a trend trader will look to enter the trade on the pullback, expecting it to continue for some time using the moving averages as a guide for when the trend breaks.

2. Mean Reversion:

This strategy is based on the idea that prices will eventually return to an average. In other words, if a futures contract is super bullish, it will eventually pull back and consolidate. After all, not everything can go straight up forever. What goes up must come down, and the cycle of the market always finds an equilibrium. 

Here’s how you can predict mean reversion:

- If price is moving in a channel, find the mean and expect a move back to this area

- When price action accelerates, look for the most recent price congestion area as a target for the reversion.

- Use common moving averages like the 10, 20, or 50 moving averages to gauge health pullbacks.

Example:

If the Nasdaq has been trading in a range between 16,137 and 15,916 for a few weeks but suddenly drops to 15,800 from negative news, a mean reversion trader might take a long position betting that the price of the Nasdaq returns to the range between 13k and 14k.

3. Breakout Trading:

Breakouts are one of the most popular trading strategies of all time. They were popularized by Nicholas Darvas, Wyckoff, Livermore, O’Neil, and Minervini. The great thing about them as that they are easy to spot on a chart. If a futures contract is consolidating sideways for some time, breakout traders will look to enter a trade after the price moves into new high ground.

Common things to look for with breakout trades:

- The best trades usually work right away with increased volume and during the early phases of a new trend.

- A consolidation period that is too deep may result in a faulty breakout, so be sure to set your risk accordingly if the instrument fails to start a new trend.

- Study the Volatility Contraction Pattern and the Cup with Handle Pattern

Example:

Let’s say the NQ is trading in a range from $18500 to $17000. Once the price breaks above $18,500, you would take a long position expecting the price of the NQ to continue with a new trend. If the price returns below $18,500, you will look to cut your position for a small loss.

4. Scalping:

Scalpers are short-term traders looking to make a quick buck off of shorter price movements. Many scalpers make a lot of trades so that their gains eventually add up to a decent profit. Additionally, scalpers like to use leverage to amplify their gains for smaller price movements.

Tips for scalpers:

- It isn’t easy to drift between holding long-term and scalping strategies, so pick one and stick with it.

- Risk/Reward ratios may not be as high, but you’re seeking to have a higher win percentage with scalping.

- Scalping can utilize all the same strategies as long-term traders, but on a shorter time frame.

Example:

A scalper may take a trade in the NQ if it’s trading in a tight range between 18,200 and 18,300. On the 1-hour time frame, you may see it breaking out of a small consolidation at 18,300. For the day trade, you take it long on the breakout and sell for a push to a higher resistance level at 18,400.

Fundamental Analysis for Nasdaq Futures Traders

Aside from technical analysis strategies, fundamentals also play a crucial role in Nasdaq futures. Since the contracts portray the underlying index, all the economic market-related factors that impact the index can also impact the futures market. To that end, let’s analyze some of the fundamentals you should be aware of when trading the Nasdaq futures.

Company Earnings

Earnings reports, while not directly related to the NQ can indirectly impact it depending on the severity and importance of the report. For example, many of the big tech companies found in the Nasdaq, like Apple, could have a negative report that brings the rest of the big tech companies down.

Because the Nasdaq aggregates these companies into an index, it could follow suit after an earnings report. Likewise, a strong earnings report could cause a favorable move in the futures market.

Economic Indicators

Economic indicators are any component of the economy that could affect the markets. The most common indicators are the GDP growth numbers, inflation rates, employment data, and consumer spending reports. Depending on the expectation for these numbers and the results, index futures like the Nasdaq could bounce or take a hit, or both!

Most of these announcements are predicted in their regularity, but unpredictable in the impact they’ll have on the market. It’s good to know when the news is expected to be released to protect your position.

Interest Rates

The Federal Reserve greatly impacts futures markets and markets in general. The central banks are in charge of raising and lowering interest rates to make borrowing more or less expensive. Either of these can cause a reaction in the market if investors are blindsided. For example, higher interest rates could lead to a decrease in corporate profits and stock prices, whereas lower interest rates usually boost the economy by making borrowing cheaper.

When Fed Chair Jerome Powell is on tap to speak, the markets are all ears. Make sure you keep up with the prevailing wind of interest rate direction to protect your portfolio.

Geopolitical Events

Disasters, wars, droughts, and others can impact Nasdaq futures. While they may have specific impacts on other commodities like agriculture or energy markets, indices can be affected as well. Trade wars and political instability can put pressure on the tech industry if chip manufacturers in China are running low on materials, for example. 

News and Announcements

Aside from earning announcements, many corporations make news and announcements regularly. For example, mergers, new CEOs, stock offerings, new product launches, or regulatory changes to any of the underlying companies in the Nasdaq 100 can have a ripple effect on the entire index, including futures.

Market Sentiment

While not as immediately recognizable as a big news event, the overall attitude of investors toward the market can provide a boost or a burden to Nasdaq futures. Consider this the collective inflow or outflow of money from the markets. If participants are bullish, you can expect them to put their money to work, usually increasing stock prices. On the contrary, bearish sentiment can spell trouble for the indices.

As you can see, a wide range of fundamental factors can influence the broader market including Nasdaq futures. It would behoove you to have a good grasp of these potential influences on the price of futures, helping you make a more informed decision with your trading.

Key Takeaways for the Best NASDAQ Futures Trading Strategies

Remember that with any trading strategy, risk is always a major factor. To that end, we recommend you start trading Nasdaq futures in our trading simulator here at TradingSim. There is no better way to test out your strategies, whether it's a trend following, mean reversion, breakout, or scalping strategy.

Ideally, you’ll want to spend at least 6 months to a year in the simulator before you place your first trade. Analyze your strategy’s win percentage, annotate your trades in our trade log, and improve your stats before throwing good money in the market.

If you’re looking for more strategies that can apply to any market regardless of the instrument, be sure to have a look at our free education resources here at TradingSim, especially the trading strategies section. When you finish that, take a look at all the chart patterns we outline for you.

Take advantage of our 7-day free trial. See you in the sim!