The Complete Guide to Global Index Futures: Master International Index Trading from Scratch

In the world of investing, indices are like a window that allows us to see the true pulse of entire industries, countries, and even the precious metals markets. However, indices themselves cannot be bought or sold directly. This is why Global Index Futures have emerged—they enable investors to participate in the ups and downs of global markets with leverage.

What are Index Futures? Why Do Investors Need Them?

Index futures are financial derivatives that track the performance of specific indices, with fixed expiration dates, contract specifications, and margin requirements. Unlike physical futures (such as gold or crude oil), index futures are cash-settled because indices are not tangible commodities.

Originally, index futures served as hedging tools for institutional investors. When they hold large amounts of stocks but find it difficult to exit quickly, and have a bearish outlook on the economy, they can hedge risks by shorting index futures. Today, this market has opened to retail investors, expanding from simple hedging to speculation and arbitrage, with a variety of indices including stock indices, forex indices, and volatility indices.

What are the Major Global Index Futures?

U.S. indices are the most watched, including the Dow Jones Industrial Average, S&P 500, and Nasdaq 100. These three major indices are popular mainly because:

• Flexible contract sizes: Besides standard contracts, there are mini versions (one-fifth size), greatly lowering entry barriers.
• Sufficient liquidity: The market cap of S&P 500 components accounts for 58% of U.S. stocks, and Nasdaq 20%, with strong market linkage, leading to more accurate price predictions.

European indices include the German DAX and the UK FTSE 100. Asia features indices like the Nikkei 225, Hong Kong Hang Seng, and FTSE China A50.

How Do Different Exchanges’ Index Futures Differ?

The same index listed on different exchanges may have vastly different trading conditions. The three major U.S. index futures are mainly traded on CME, priced in USD; but similar contracts are also available on Taiwan Futures Exchange, settled in TWD.

Taking Mini Nasdaq Futures as an example:

Trading in TWD saves currency exchange hassle but has lower trading volume and wider bid-ask spreads, which is less suitable for short-term traders.

Understanding Contract Specifications to Avoid Forced Liquidation

Futures operate on a margin system. Investors only need to deposit a portion of the contract value as margin, which is the source of leverage. For example, in Taiwan index futures:

This means if the index drops more than 215 points (less than 2%), the account will hit the liquidation level. Many investors, confident in the direction but caught by small fluctuations, get forcibly liquidated—an unfortunate outcome. It’s recommended to deposit more than the minimum margin to allow sufficient operational space.

Three Major Investment Advantages of Global Index Futures

1. Hedging Portfolio Risks

Institutional investors holding stocks cannot trade frequently during long holidays or bear markets. Shorting corresponding index futures is the fastest way to hedge risks.

2. Amplifying Returns for Speculation

Compared to stock margin trading with only 2.5x leverage, futures often offer ten or twenty times leverage, and both long and short positions are possible. As long as the market direction is correctly judged, profits can be made regardless of market rises or falls.

3. Low-Risk Arbitrage Opportunities

Price differences between near-month and next-month futures, or between the same index on different exchanges, can serve as arbitrage opportunities with near-zero risk. Professional investors leverage these spreads to harvest profits.

Three Ways to Enter the Market, Each with Pros and Cons

Method 1: Opening a futures account with a Taiwanese securities firm
Advantages: Quick and easy account setup.
Disadvantages: Low trading volume, wide bid-ask spreads, less cost-effective.

Method 2: Opening an account with an overseas futures broker
Advantages: Large trading volume, narrow spreads.
Disadvantages: Frequent currency exchanges, currency risk.

Method 3: Trading indices via CFDs (Contracts for Difference)
Compared to the above two, CFDs have unique advantages:

• Trade in USD, no currency risk
• Smaller spreads
• No expiration date restrictions
• 24-hour trading for long and short positions
• Minimum trading unit of 1/100, offering high capital flexibility

For example, Mitrade offers risk management tools like Take Profit, Stop Loss, Trailing Stop, and Negative Balance Protection, ensuring losses do not exceed the initial investment. They also charge no commissions and provide a USD50,000 demo account for beginners.

Practical Trading Strategies

Spread Convergence Trading

Track different futures of the same underlying. Market players sometimes widen the spread, but it will inevitably converge. Traders can buy and sell when the spread widens, then close positions for profit upon convergence.

Near-month and Next-month Arbitrage

As futures approach expiration, their prices tend to align with spot prices. Traders can simultaneously operate near-month and next-month contracts to profit from the convergence of the month spread.

Policy Trend Trading

U.S. dollar index futures are highly correlated with FED interest rate hikes or cuts. Once policy directions are confirmed, they tend to be long-term trends, and leverage can amplify relatively stable gains.

Corporate FX Hedging

Taiwanese companies quoting in USD but incurring costs in TWD can hedge exchange rate risks by calculating delivery deadlines and trading corresponding currency futures in advance.

Fundamental Differences Between Futures and Stock Trading

Trading Method: Stocks involve paying cash upfront for delivery; futures give the right to exchange at a future date at a set price—essentially a contract.

Holding Costs: Index futures do not require actual stock ownership, only settling price differences; stocks involve full ownership risk.

Capital Efficiency: Futures require only a margin deposit to control the contract value; stocks require full payment or margin financing.

Trading Hours: Most futures offer extended or 24-hour trading; stocks are limited to market hours.

Investment Horizon: Futures are inherently short-term trading tools, unsuitable for long-term holding; stocks are suitable for medium to long-term allocation.

Final Reminder

Global index futures are neither inherently good nor bad; it depends on how they are used. Leverage is a double-edged sword—amplifying gains but also accelerating losses. Before investing, thoroughly learn contract rules, strictly implement risk management, and ensure long-term survival in the market. Beginners are advised to start with demo accounts to familiarize themselves before committing real funds.