How to Play Global Futures Indices? A Guide to Trading Rules and Risk Management

The most frustrating thing about investing is choosing the right target, after all, the true situation of listed companies is hard for ordinary investors to grasp. So smart institutions have created various “indices” to help investors quickly understand industry, country, and even commodity price trends.

There are many types of indices—stock baskets, bond portfolios, currency sets, and more. But here’s a problem: indices are virtual; you can’t buy or sell them directly. That’s why global futures indices have emerged.

Index futures are financial derivatives based on indices, with prices fluctuating in line with the performance of the corresponding index. They have specific trading rules and contract specifications, and investors can use them for speculation, hedging, or arbitrage. So, what kinds of global futures indices are there? What are the trading rules? Where are the risks?

Core Logic of Index Futures

Like other futures contracts, index futures have three main elements: expiration date, contract specifications, and margin requirements. The biggest difference is: indices are not physical commodities, so at expiration, they can only be settled in cash, unlike gold futures or crude oil futures, which can be physically delivered.

Early index futures were mainly used by large institutional entities for hedging. For example, a fund holding a large number of stocks might want to hedge risk but avoid frequent market entry and exit, so they could short the corresponding index futures to offset risk.

Now, index futures are no longer exclusive to institutions. Retail investors are flooding into this market, and their uses have expanded from simple hedging to speculation and arbitrage. The variety of indices is also increasing—ranging from traditional stock indices and forex indices to the VIX fear index, with so many options that it’s dizzying.

What Are the Major Global Futures Indices?

When talking about index futures, investors usually refer to “major index futures.” For example, Taiwan’s TAIEX futures track the Taiwan Weighted Index, and major countries worldwide have their own representative index futures:

U.S. Indices: Dow Jones Industrial Average futures, S&P 500 futures, Nasdaq 100 futures

European Indices: DAX (Germany), FTSE 100 (UK)

Asian Indices: Nikkei 225, Hang Seng Index (Hong Kong), FTSE China A50

The three major U.S. index futures are especially popular. Why?

First, contract sizes are flexible. Besides standard contracts, there are mini versions (about one-fifth the size of the standard), greatly lowering the barrier to participation.

Second, indices are highly representative and liquid. For example, the S&P 500’s market cap accounts for 58% of the total U.S. stock market, and Nasdaq accounts for 20%. These indices are closely related to market trends, making price movements easier to predict.

Different Exchanges, Different Rules

Note this phenomenon: Most well-known index futures are listed on their own country’s futures exchanges and settled in the local currency. For example, U.S. index futures are in USD, DAX in euros, FTSE 100 in GBP.

However, to facilitate domestic investors, many countries’ futures exchanges offer trading in these international indices in their own currencies. For example, Taiwan Futures Exchange provides TWD versions of Dow Jones and Nasdaq futures.

The advantage is that no currency exchange is needed—orders are placed directly in TWD. The downside is that these contracts tend to have lower trading volume, wider bid-ask spreads, and are less cost-effective.

At the same time, the trading hours for futures contracts listed on domestic exchanges are synchronized with other futures products in Taiwan, which differ from international trading hours. Contract specifications, fees, and margin requirements vary across exchanges.

For example, the initial margin for Nasdaq mini futures on CME is USD 1,738, with a maintenance margin of USD 1,580, and a minimum tick of 0.25 points (equal to USD 0.5); while on Taiwan Futures Exchange, Nasdaq futures require TWD 50,000 initial margin, TWD 39,000 maintenance margin, and a minimum tick of 1 point (TWD 50). Trading hours also differ: CME is from 6:00 to 5:00 the next day, while Taiwan’s session is 8:45-13:45 and 15:00-5:00.

Leverage Is the Soul of Index Futures

The core appeal of index futures lies in leverage. Futures use a margin system, allowing you to control a contract without paying the full amount. For example, with TAIEX futures, if the index is at 17,000 points, one contract is worth about TWD 3.4 million. But you only need to deposit TWD 184,000 as margin—this is about 18.4 times leverage.

Sounds exciting, but risks are significant. Futures are settled daily, and profits or losses are adjusted based on daily price movements and margin requirements. If the index drops more than 215 points in a day, it will breach the initial margin level, and if you don’t top up, you’ll face forced liquidation. That’s less than 2% of the index value.

So even if you are correct on the trend, small fluctuations can force you out, resulting in losses. It’s recommended to keep sufficient margin as a buffer and avoid trading at the minimum margin requirement.

Three Major Uses of Index Futures

Given the high leverage risk, why do so many still trade them? Because if used correctly, index futures are a profitable tool.

First: Hedging

Institutions holding stocks that can’t be traded frequently might short index futures during long holidays or bearish periods to hedge risk. For example, a fund holding U.S. stocks expecting a short-term downturn might buy S&P 500 futures to hedge.

Second: Speculation

If you are confident about a major trend, you can use futures’ leverage to amplify gains. Stock margin trading offers around 2.5x leverage, but futures can offer ten or twenty times. Plus, futures allow both long and short positions, enabling profit from both rising and falling markets—if your direction is correct.

Third: Arbitrage

Futures prices will eventually converge with spot prices, and the price difference can be exploited. For example, buying near-month futures and selling next-month futures to profit from the narrowing spread. This is a low-risk strategy.

How to Trade Global Futures Indices?

To participate in global futures index trading, there are several options:

Open a local futures account

Open a futures account with a Taiwanese brokerage; deposit funds to start trading. The advantage is convenience and speed, but trading volume is small, spreads are wide, and fees are relatively high.

Open an overseas futures account

Use an international futures broker; the benefits are larger trading volume and narrower spreads. The downside is currency exchange—you need to convert currencies regularly, bearing FX risk. Also, each international index is traded in its own currency, which can be cumbersome.

Trade via Contracts for Difference (CFD)

A popular recent method. CFDs have fewer restrictions—they have no expiration date, flexible contract specifications, support 24-hour trading, and allow both long and short positions. More friendly for retail investors.

Compared to the other two, local futures have low liquidity and wide spreads; overseas futures have good liquidity but currency exchange hassles. For simple and efficient participation in global futures indices, choosing a regulated platform offering CFD trading is a practical option.

Four Classic Trading Strategies

Spread Convergence Trading

Indices tracking similar or related assets usually move closely, but due to different traders, spreads can widen. When the spread widens significantly, buy one and short the other, then close when the spread narrows. Low risk and steady returns.

Arbitrage Trading

As futures approach expiration, prices tend to align with spot prices, and the spread shrinks. By simultaneously buying near-month and selling next-month futures, you can profit from the convergence—low risk.

Trend Trading

Some indices are linked to macro factors. For example, the US dollar index correlates with Fed policies. Once the policy direction is clear, enter positions using leverage to amplify trend gains. This requires strong fundamental analysis skills.

Hedging

Taiwanese exporters quote in USD but incur costs in TWD. Currency fluctuations directly impact profits. Many companies buy or sell corresponding currency futures in advance to hedge FX risk. This is especially practical for physical businesses.

Futures vs Stocks: What Is the Fundamental Difference?

Different trading logic

Buying stocks is spot trading—pay money, receive shares. Index futures are contracts to buy or sell the underlying at a specific price at a future date. You only pay or receive the price difference, not the actual stocks.

Margin system

Stocks require full payment (or margin financing at about 2.5x). Futures only require a margin deposit, controlling the entire contract value—this is leverage, and also the source of risk.

Trading hours

Stock markets have fixed hours; index futures often trade longer, some 24 hours. This allows traders to exploit time differences for short-term trades.

Suitable investment horizon

Stocks are more suitable for medium to long-term investing and position building. Futures, with inherent leverage and time considerations, are better suited for short-term trading and swing strategies.

Final Advice

Index futures are neither good nor bad—they depend on how you use them. The leverage feature means that price volatility can quickly lead to forced liquidation and losses.

If you decide to participate in global futures index trading, be sure to:

1. Thoroughly learn trading rules and risk management
2. Strictly follow your trading plan; avoid impulsive trades
3. Maintain sufficient margin to allow room for adjustments
4. Choose regulated, reputable platforms
5. Preferably start with demo accounts to familiarize yourself

Only by truly understanding the nature and risks of these tools can you become a consistent winner in the market.