Futures Trading Beginner's Guide | Learn the Basics of Futures Trading and Risk Management from Scratch

What Exactly Are Futures? Clarifying the Core Concepts

Futures are essentially contracts where both parties agree to buy or sell an asset at a predetermined price on a future date, matched through open bidding on an exchange. Unlike spot trading, which involves immediate delivery, futures can cover a variety of underlying assets including commodities, raw materials, exchange rates, stock indices, and bonds.

At expiration, futures are forcibly settled, which is a key feature distinguishing them from other investment tools. In Taiwan’s futures market, the most popular product is the Taiwan Weighted Stock Index Futures, but internationally, the range of futures is much broader.

Core Features You Need to Know About Futures Trading

Before diving into futures trading, it’s essential to understand several key characteristics:

Standardized Contract Features — Each futures contract has clear specifications: product code, trading volume (contract multiplier), minimum price fluctuation, trading hours, delivery date, and settlement method (physical delivery or cash settlement). These details determine how you calculate your profit and loss.

Leverage and Margin Mechanism — Futures trading does not require full payment upfront; instead, traders deposit a margin (usually 5%-20% of the contract value). This margin system provides leverage, meaning a small amount of capital can control a large contract. For example, the initial margin for a large Taiwan index futures contract is about NT$300,000, but the contract’s total value is much higher.

Flexibility of Two-Way Trading — Futures allow both long (buy then sell) and short (sell then buy) positions, without the restrictions of stock short-selling rules, offering more flexible trading strategies.

Practical Steps for Futures Trading

Step 1: Assess Your Investment Style

Before starting, review your investment experience and preferences. Long-term investors generally find futures unsuitable as a primary tool; futures are more suited for short-term trading or hedging. If you hold assets for many years, the expiration and delivery mechanisms of futures may cause complications.

Step 2: Choose the Right Trading Platform and Products

Futures are issued by major exchanges such as Taiwan Futures Exchange, CME (Chicago Mercantile Exchange), NYSE (New York Mercantile Exchange), etc. Retail investors need to place orders through a futures broker (the broker’s futures department) via electronic trading.

In Taiwan, the variety of futures products is limited—mainly Taiwan index futures and single-stock futures, with less liquidity in currency, metals, and energy futures. International markets offer a richer selection, including index futures (S&P 500, Nasdaq 100), interest rate futures, commodity futures, metal futures, and energy futures.

Step 3: Test Your Trading Strategies Using a Demo Account

Before depositing real funds, it’s crucial to test your strategies with a demo account. Many platforms offer free virtual trading funds, allowing you to verify whether your futures approach is feasible without risk. This stage helps you familiarize yourself with the platform, experience leverage effects, and test entry and exit signals.

Step 4: Prepare Sufficient Margin and Start Trading

Once you’ve selected your trading assets, understand the margin requirements for each contract. For example, the initial margin for a small Taiwan index futures contract is about NT$76,500, while Nasdaq 100 futures require around NT$98,000. After funding your account, you can begin trading.

Step 5: Master Trading Signals and Technical Analysis

Futures traders typically prefer highly liquid assets, especially near expiration. Trading signals can come from fundamental analysis, economic data, or technical analysis. For stock futures investors, analyzing company and market fundamentals is similar to stock investing, but since futures have expiration dates, it’s advisable to enter positions when technical signals are emerging, as this makes market direction easier to grasp.

Step 6: Set Clear Trading Directions

Long Strategy — Expect asset prices to rise, so buy futures contracts. For example, if you anticipate oil prices will increase, buy crude oil futures; if you believe the US stock market will rebound, buy S&P 500 futures.

Short Strategy — Expect prices to fall, so sell futures contracts. If your forecast is correct, the position’s value will increase. For example, if you expect a stock market decline, sell Dow Jones futures.

Step 7: Establish Stop-Loss and Take-Profit Mechanisms

This is one of the most overlooked yet critical aspects of futures trading. Both long and short positions are vulnerable to market volatility. Beginners should set tighter stop-loss levels and smaller positions initially, then gradually adjust as experience grows. Strictly adhering to stop-loss and take-profit rules is fundamental to profitability in futures; avoid any gambler’s mentality.

Advantages and Risks of Futures Trading

Main Advantages

High Capital Efficiency — Leverage allows controlling large contracts with a small amount of capital, enabling big gains from small investments.

Long and Short Flexibility — Unlike stock short-selling, which requires borrowing shares, futures can be shorted easily and conveniently.

Hedging Capabilities — When holding physical assets, futures can be used to hedge against price fluctuations, protecting existing gains.

Ample Liquidity — International futures markets are highly active, transparent, and facilitate large fund inflows and outflows.

Main Risks

Leverage as a Double-Edged Sword — Leverage amplifies both gains and losses. Misjudgments without proper stop-loss protection can lead to rapid losses.

Unlimited Risk Exposure — Unlike stocks, where the maximum loss is the invested capital, futures require only a margin deposit. Extreme price movements can cause losses exceeding the margin, potentially resulting in owing money to the broker.

High Entry Barriers and Professionalism — Futures involve complex concepts like leverage and rollover, requiring substantial knowledge and discipline.

Standardized Contracts Only — Futures are fixed in standard specifications; customization is not possible, limiting strategies to long or short positions.

Contract for Difference (CFD): Combining Futures Flexibility with Spot Market Advantages

CFD is a financial derivative similar to futures but more suitable for retail traders. A CFD is an agreement between buyer and seller based on the spot price, settled by the difference between buy and sell prices, with no physical delivery and no expiration date.

Advantages of CFDs over Futures

Wide Range of Products — Unlike Taiwan’s limited futures options, CFD platforms offer over 400 financial instruments, including stocks, forex, cryptocurrencies, and commodities.

More Flexible Trading — No delivery date restrictions; can be held long-term; leverage ratios can be adjusted freely (typically 1-200x); minimum trade sizes can be as low as 0.01 lot.

Lower Costs — Initial margin requirements are lower, making entry easier.

Key Points for CFD Trading

Use Leverage Cautiously — Currency pairs tend to have low volatility, so higher leverage can be used; stocks and commodities are more volatile, so lower leverage is advisable.

Develop a Complete Trading Plan — Before investing, formulate strategies, set stop-loss and take-profit levels, and ensure risks are manageable.

Core Philosophy of Futures Trading

To succeed in futures markets, a complete and executable trading system is essential. This system should include clear entry signals, risk management rules, and profit-taking and stop-loss levels. More importantly, strict adherence to this system is crucial; do not deviate due to short-term fluctuations or emotions.

Beginners should first thoroughly learn market rules, practice repeatedly with demo accounts, and gradually develop their own trading logic. Only with solid knowledge and mature psychology can traders survive and profit in the high-leverage, high-risk futures environment over the long term.