Futures Trading Ultimate Guide | A Complete Guide for Beginners on Going Long and Going Short

What Are Futures? Understanding This Financial Derivative

Futures are a type of contract trading where both parties agree on a specific date in the future to deliver the underlying asset at a price agreed upon today. The underlying assets for futures are very diverse and can include stock indices (such as the Taiwan Weighted Index), commodities (crude oil, gold, agricultural products), foreign exchange, bonds, and other financial assets.

In simple terms, futures are a “game” — you and your trading counterpart place orders on the exchange, one buys and one sells, and they are matched for execution. The key point is that futures contracts have an expiration date, after which they must be closed out and settled. This is different from stocks, which can be held indefinitely.

In Taiwan’s futures market, the most actively traded is the Taiwan Index Futures, which is based on the Taiwan Stock Exchange Weighted Index.

Key Details You Must Know About Futures Contracts

Each futures contract is not arbitrarily set; the exchange specifies all parameters in detail. When you visit a futures broker’s website, you’ll see information such as:

• Product Code — used to identify the underlying asset
• Trading Size — how many units of the underlying asset one contract represents
• Minimum Price Fluctuation — the smallest tick size for price movements
• Trading Hours — the open and close times for the contract
• Expiration and Settlement Date — the date when delivery is mandatory
• Settlement Method — physical delivery or cash settlement

For example, Taiwan Index Futures have a contract size of 5 points representing NT$100, with a contract multiplier of 200. These details determine how much profit or loss you can make per trade.

The Five Truths You Must Know Before Playing Futures

First, futures are leveraged trading. You don’t need to pay the full value of the contract—only a margin (usually 5-15% of the contract value)—to control the entire position. This is an advantage but also a trap.

Second, leverage is a double-edged sword. It can magnify your profits but also your losses proportionally. If you misjudge the market direction, you could lose your margin, get forcibly liquidated, or even owe money to your broker.

Third, futures can be long or short. Unlike stock investors who can only profit from rising prices, futures traders can short sell, selling first and buying later, to profit from declines. No need to apply for day-trading privileges; trading is highly flexible.

Fourth, trading costs for futures are much lower than stocks. Lower commissions and narrower spreads make futures especially attractive for short-term traders.

Fifth, high-frequency trading and high leverage are the twin killers of futures. Many beginners overtrade due to low transaction costs, and with leverage amplifying risks, they end up with heavy losses. Therefore, the key to success in futures trading is not just skill but having a complete, executable trading system and strict discipline.

How to Play Futures? Complete Trading Roadmap

Step 1: Understand the Basic Logic of the Futures Market

Futures are not stocks. Stocks can be held forever; futures must be closed before expiration. You only need to pay margin to enter, and leverage can magnify both gains and losses. You can trade both long and short, regardless of whether the market is bullish or bearish.

Step 2: Determine Your Trading Style

Are you a long-term investor or a short-term trader? This is very important. Long-term investors usually shouldn’t use futures as their main tool; futures are more suitable for hedging or short-term volatility trading. Review your past investment habits and decide the role futures will play.

Step 3: Choose a Reputable Futures Broker to Open an Account

Futures are issued by exchanges in various countries—Taiwan has the Taiwan Futures Exchange, the US has CME(CME), NYMEX(NYMEX), COMEX(COMEX), Singapore has the Singapore Exchange, etc. Retail investors cannot trade directly on the exchange; they need to open an account with a futures broker.

In Taiwan, brokers include Yuanta, KGI, Fubon, Cathay, and others. International platforms cover global commodities like US stocks, crude oil, gold, etc.

Choosing a good futures broker is crucial: one that offers multiple products, accurate and fast quotes, low commissions—all directly impacting your trading costs and execution efficiency.

Step 4: Use a Demo Account to Test Your Trading Strategies

After opening an account, don’t rush to deposit real money. Practice with a demo account to verify whether your trading strategies can generate profits in the market. Demo accounts usually provide free virtual funds, allowing risk-free testing. This step is vital for beginners—it helps you identify flaws in your strategy without risking real money.

Key reminder: During the demo phase, develop habits like setting stop-loss and take-profit orders and strictly follow them. Leverage amplifies everything, so discipline is critical. Beginners can start with mini futures to practice.

Step 5: Select the Futures Contracts You Want to Trade

Futures market products are divided into six major categories:

The most popular are index futures and energy futures due to their high liquidity and trading volume.

Step 6: Deposit Margin and Prepare for Action

Different futures contracts require different margins. For example, Yuanta’s main contracts in Taiwan:

After depositing, you can officially start trading. But before that, the following steps determine whether you can truly profit.

Step 7: Learn to Read the Market and Capture Trading Signals

Finding trading signals is the foundation of all trading. Futures traders usually prefer contracts with high liquidity, i.e., near-expiration contracts (long-dated contracts tend to be less liquid and should be avoided).

Signals come from three sources: fundamental analysis (economic data, policy changes), news (major events), and technical analysis (candlestick patterns, moving averages, indicators).

If you’re trading stock futures, the logic is similar to stocks—analyzing companies and industries. But because futures have expiration dates, it’s recommended to enter before technical signals activate—this is when the trend is easiest to identify and the win rate is highest.

Step 8: Decide Your Trading Direction — Long or Short

Going Long: Expect the asset price to rise, so you buy the contract first.

Example: You believe the Fed will stimulate the economy by releasing liquidity, expecting a strong rebound in US stocks. You buy S&P 500 futures; when prices rise, the futures value increases, and you profit by selling at a higher price.

Going Short: Expect the asset price to fall, so you sell first and buy back later.

Example: You think geopolitical risks will push oil prices down sharply. You sell crude oil futures; if oil prices fall as expected, your short position gains value, and you profit when closing the position.

The power of futures lies here—you can profit in both rising and falling markets.

Step 9: Set Stop-Loss and Take-Profit to Protect Capital

Whether long or short, market volatility is normal. Setting stop-loss and take-profit orders is not optional but essential.

For beginners, it’s recommended to set relatively tight stop-loss distances and smaller positions. As you gain experience, adjust your stop-loss and take-profit levels based on market volatility and your risk tolerance.

Pros and Cons of Futures Trading

Three Major Advantages

◆ Leverage amplifies capital efficiency — control large contracts with small capital, achieving a “small capital, big position” effect. For example, with NT$100,000 margin, you can trade contracts worth NT$1,000,000.

◆ Easy to go long or short — short selling stocks is difficult and costly (requires borrowing), but futures shorting is as simple as going long. Especially advantageous in volatile or bear markets.

◆ Hedging tool — if you hold a basket of stocks and worry about short-term declines, you can hedge risk by shorting index futures without selling your stocks.

◆ High liquidity and transparent trading — international futures markets trade frequently, with small bid-ask spreads, suitable for large capital seeking sufficient investment options.

Four Major Risks of Futures

◆ Unlimited leverage risk — leverage is like a double-edged sword; it can create opportunities but also cause self-harm. Without strict stop-loss mechanisms, futures trading can become extremely dangerous.

◆ Unlimited liability risk — buying stocks at most loses your principal, but futures require only margin. If the market moves extremely against you, you could lose far more than your margin and even owe money to the broker. This is the most terrifying aspect of futures.

◆ Higher entry barriers and professional requirements — although margins are relatively low, futures are more complex and riskier than stocks, requiring higher professional knowledge and mental resilience.

◆ Fixed contract specifications lack flexibility — futures are standardized contracts; trading quantities, expiration dates, and margin ratios are fixed. Once you choose a contract, you can only go long or short, with little room for adjustment.

Contract For Difference (CFD) — A More Beginner-Friendly Derivative

If you find futures too complicated or risky, consider Contract For Difference (CFD). CFDs are agreements between buyers and sellers to track the spot price, settling profit or loss based on the price difference.

What is the biggest difference between CFDs and futures? CFDs have no expiration date, do not involve physical delivery, and do not require rollover or forced settlement. This makes them more friendly for beginners.

( Advantages of CFDs over Futures

◆ Wide range of trading instruments — Taiwan’s futures products are limited, but some platforms offer over 400 financial instruments via CFDs, including stocks, forex, cryptocurrencies, commodities, and more, providing much greater choice.

◆ More flexible trading — CFDs theoretically have no delivery date and can be held indefinitely. Contract specifications are more flexible, with leverage typically adjustable from 1-200x) and minimum trade sizes as small as 0.01 lots(. Futures contracts are fixed and lack such flexibility.

◆ Lower entry costs — CFDs are margin trading too, but with more flexible leverage ratios and usually lower margin requirements than futures.

) Key Points in CFD Trading

1. Carefully control leverage

Leverage multiples depend on the volatility of the underlying asset. When trading forex, due to relatively moderate volatility, higher leverage can be used. For stocks or commodities with higher volatility, lower leverage is recommended. Regardless, beginners should start with low leverage.

2. Develop a complete trading plan

The core of CFD trading is establishing a trading system—setting entry signals, exit points, stop-loss, and take-profit mechanisms. The overall logic is to go long or short, but within this framework, multiple risk defenses should be set to maintain manageable risk and generate consistent returns.

Common Mistakes Made by Beginners

1. Over-leveraging — using the maximum leverage at the first sign of opportunity, only to be wiped out by a single fluctuation.
2. No trading plan — entering and exiting trades randomly, relying on feelings, and regretting losses afterward.
3. Frequent trading — overtrading due to low commissions, which increases transaction costs and the chance of losses.
4. Not setting stop-loss orders — hoping losing trades will rebound, but ending up with bigger losses.
5. Psychological breakdown — suffering a big loss and becoming reckless or overly cautious afterward.

Final advice: Futures and CFDs are tools with high returns and high risks. They won’t make you rich overnight, but with discipline, a systematic approach, and patience, they can be powerful weapons to boost your investment portfolio. Start small, use demo accounts to repeatedly test your strategies, and only increase your positions once you truly understand the market rhythm. Remember: surviving the futures market is already a victory.