Complete Guide to Futures Investment | Understanding Contract Trading and Risk Management from Scratch

I. Understanding the Nature and Core Characteristics of Futures

Futures are standardized contract transactions where both parties agree to buy or sell at a predetermined price at a specific future date. This concept sounds simple, but the risks and mechanisms involved are far more complex than spot trading.

Futures underlying assets include:

• Stock indices (e.g., Taiwan Weighted Index)
• Foreign exchange rates
• Precious metals (gold, silver, copper)
• Energy commodities (crude oil, natural gas)
• Agricultural products (wheat, corn, soybeans)
• Bonds and interest rate products

The biggest feature of the futures market is the margin system, where investors do not need to pay the full contract amount, only a certain percentage as margin to control a position much larger than their capital. This leverage makes futures a high-risk, high-reward investment tool.

II. Why Are Futures So Attractive to Investors? Understanding the Advantages of Futures

Compared to stock investing, futures trading has several obvious advantages:

1. More Flexible Two-Way Trading Mechanism
Futures can be long (buy when bullish) or short (sell when bearish). Stock investments are mostly one-way, expecting prices to rise; short selling requires borrowing shares and incurs higher costs. Shorting futures is as simple as buying.

2. Higher Capital Efficiency
Through leverage, you can control a larger contract value with relatively less capital, achieving “small investment for big gains.” For example, paying 10,000 yuan in margin might control a 500,000 yuan contract.

3. Sufficient Liquidity
International futures markets trade frequently, with transparent quotes, making them ideal trading tools for large capital investors.

4. Hedging Tool
Investors holding spot positions can offset price volatility risks by taking opposite futures positions, protecting existing investment gains.

5. Lower Transaction Costs
Futures trading does not require day-trading qualifications, and transaction costs are lower than stocks, which is also a key reason short-term traders are attracted.

III. But Risks Cannot Be Ignored｜The Three Major Pitfalls of Futures Trading

When investors are attracted by the flexibility of futures, they often overlook its dangers. Here are the three most common risks in futures trading:

1. Leverage Amplifies Risks
Leverage is a double-edged sword. Correct market direction can double profits, but wrong judgment can double losses. High leverage trading can trigger margin calls or account liquidation with slight missteps.

Example:

• An investor uses 100,000 yuan margin to trade futures with 50x leverage, controlling a 5 million yuan position
• If the market drops by just 2%, the investor loses 100,000 yuan (entire capital)
• Continued decline may require additional margin, or forced liquidation

2. Unlimited Loss Responsibility
Stock investors can lose at most their principal, but futures are different. Since only margin is paid, the actual control is leveraged, and in extreme scenarios (like black swan events), losses can exceed the invested capital, even owing money to the broker.

3. Contract Expiry and Forced Settlement
Futures contracts have a clear expiration date. At expiry, they are settled in cash or physical delivery. Investors must plan their positions in advance to avoid being forced to close positions at unfavorable times.

IV. Futures Trading Specifications and Operating Mechanisms

To invest in futures, you must first understand the basic elements of a contract. Each futures contract clearly specifies:

• Product Code: Identifier for the underlying asset
• Contract Specifications: Quantity of the underlying per contract (e.g., 1 point of Taiwan index futures equals 1 index point)
• Minimum Price Fluctuation: Smallest price movement
• Trading Hours: Trading session times
• Expiration Date: Last trading day
• Settlement Method: Cash settlement or physical delivery

For example, Taiwan index futures include large-sized (FITX) and mini-sized (FIMTX) specifications, catering to different investor capital sizes.

V. A Step-by-Step Guide to Mastering the Complete Futures Investment Process

Beginners should not rush into futures investing. Follow these steps gradually to build a solid foundation.

Step 1｜Theoretical Foundation First

Before investing, understand these core concepts:

• Futures have an expiration date; unlike stocks, they cannot be held indefinitely
• Margin system allows controlling large positions with small capital
• Leverage is a double-edged sword, amplifying both profits and losses
• Futures support both long and short trading, more flexible than stocks

Step 2｜Determine Your Trading Style

Reflect on past investment experience:

• Are you accustomed to long-term holding or short-term swings?
• How much can you psychologically tolerate market fluctuations?
• What is your available capital?

If you prefer long-term investing, futures may not be your main tool; instead, they can serve as risk hedging aids. Short-term traders are the primary audience for futures.

Step 3｜Choose a Suitable Trading Platform

Futures are issued by various exchanges, such as Taiwan Futures Exchange, CME, NYMEX, etc. Investors need to open an account with a futures broker.

Evaluation criteria for choosing a broker:

• Variety of tradable products
• Speed of quote updates
• Competitive commission rates
• Availability of comprehensive electronic trading and risk management tools

Step 4｜Use Demo Accounts to Test Strategies

Before real trading, practicing with simulated funds is essential. Demo accounts allow you to:

• Familiarize with platform functions
• Test the feasibility of your strategies
• Learn market dynamics without real losses
• Build trading experience and psychological resilience

It’s recommended for beginners to start with mini futures contracts to reduce the cost of trial and error.

Step 5｜Select Trading Targets and Margin Requirements

After verifying your strategy, choose the futures products to invest in. Different contracts have varying margin requirements; select suitable products and scales based on your available funds.

For example, in Taiwan, large Taiwan index futures require higher initial margins, while mini contracts lower the entry barrier. International futures offer more variety but also require attention to liquidity differences.

Step 6｜Complete Account Opening and Deposit Funds

After selecting a trading platform, complete the account registration and deposit margin funds into your trading account. Only after confirming funds are in place can you start real trading.

Step 7｜Master Market Monitoring and Signal Recognition

Identifying trading signals is key to profitability. Futures traders tend to focus on highly liquid underlying assets, especially near expiry of nearby month contracts (less liquid for deferred contracts).

Methods for signal recognition include:

• Technical Analysis: Using candlesticks, moving averages, indicators to judge market direction
• Fundamental Analysis: Monitoring economic data and policy changes affecting the underlying
• News Analysis: Paying attention to major news events impacting the market

For stock futures investors, in-depth research on individual companies and markets is necessary, but given the expiry date, entering positions just before technical signals activate often makes the trend easier to grasp.

Step 8｜Execute Trading Strategies｜Long and Short

Once signals are clear, investors need to decide on the trading direction.

Long Strategy (Buy when bullish)

• Expect oil prices to rise, buy crude oil futures
• Bullish on stock market rebound, buy stock index futures
• Close position for profit as prices rise

Short Strategy (Sell when bearish)

• Expect oil prices to fall, sell crude oil futures
• Think the stock market will weaken, sell stock index futures
• Close position for profit as prices decline

In futures markets, going long or short is equally challenging, which is a major advantage over stocks.

Step 9｜Set Strict Stop-Loss and Take-Profit

Whether bullish or bearish, market volatility always poses risks. Setting stop-loss and take-profit levels is vital.

Recommendations for beginners:

• Set conservative stop-loss levels to prevent large single-losses
• Keep position sizes small to test market reactions
• As experience grows, gradually adjust stop-loss, take-profit, and position sizes

Core principles for setting stop-loss and take-profit:

1. Predefine levels before entering the trade; avoid changing them impulsively
2. Strictly follow the plan, resisting emotional trading
3. Regularly evaluate strategy effectiveness and fine-tune parameters

Building a complete, executable trading system and strictly adhering to discipline are the true foundations of profitability in futures. Accurate prediction is less important than discipline.

VI. CFD｜An Alternative Combining the Advantages of Futures and Spot

Contracts for Difference (CFD) are financial derivatives where both parties track the spot price to settle gains and losses through opening and closing positions. The entire process involves no physical trading and no expiry date restrictions.

Advantages of CFDs over Futures

1. More Diverse Trading Instruments
In Taiwan, futures options are limited, but CFDs cover over 400 financial assets, including stocks, forex, cryptocurrencies, commodities, offering much broader choices.

2. More Flexible Contract Specifications

• No mandatory delivery date, can hold long-term
• Wide trading volume options (e.g., minimum 0.01 lot, maximum 30 lots)
• Adjustable leverage (1x to 200x)
• No worries about rollover or contract switching

Futures contracts are relatively fixed in specifications, lacking this flexibility.

3. Lower Entry Barriers
Although margin trading, CFDs offer more flexible leverage ratios, with much lower initial capital requirements, making them more accessible to retail investors.

Key Points for CFD Trading

First｜Leverage Control Is Critical
Different assets have varying volatility; leverage should be adjusted accordingly:

• Forex tends to be more stable, suitable for higher leverage
• Stocks are more volatile, use moderate leverage
• High-volatility commodities should be traded with lower leverage

Second｜A Complete Trading Plan Is Essential
Your plan should include:

• Entry timing and logic
• Clear stop-loss and take-profit levels
• Risk budget per trade
• Overall position management

VII. Essential Reading for Futures Investors｜The Ultimate Risk Management Guide

Success or failure in futures trading ultimately depends on risk management, not prediction accuracy.

Three Pillars of Risk Management Framework:

1. Single Trade Risk Control

• Limit maximum loss per trade to 1-2% of total capital
• Do not alter your plan after a loss
• Review your strategy immediately after consecutive losses

2. Overall Portfolio Risk Control

• Total risk of all open positions should not exceed 5% of total capital
• Be cautious of risk concentration in highly correlated positions
• Regularly assess overall exposure

3. Emotional and Behavioral Risk Control

• Avoid overtrading; pursue stability over greed
• Do not add to losing positions against your plan
• Strictly execute your trading plan

Remember: In futures markets, staying alive is more important than making profits. Protect your capital to achieve long-term compound growth.