Futures Trading from Beginner to Expert | In-Depth Analysis of Futures Strategies and Risk Management

I. The Essence of Futures Trading

Futures are standardized contracts where both parties agree to transact at a predetermined price on a future date. The underlying asset can be commodities, raw materials, foreign exchange rates, stocks, bonds, indices, or other financial products.

In simple terms, futures involve two parties posting bids on an exchange—one buying, one selling—and completing the transaction through matching. Unlike stocks, futures contracts have a clear expiration date, at which point they are forcibly closed and settled. In Taiwan, the most popular are futures contracts based on the Taiwan Stock Exchange Weighted Index.

II. Important Information Included in Futures Contracts

Each futures contract is specified with detailed regulations set by the exchange, which investors can review on the futures broker’s website. Contracts typically clearly specify:

• Product code
• Trading volume (contract specifications)
• Minimum price fluctuation
• Trading schedule
• Expiration date (settlement date)
• Settlement method (cash settlement or physical delivery)

III. Core Concepts to Know Before Participating in Futures Trading

Key features of futures trading:

Futures are contract-based trading with delivery dates and prices set in advance. Due to the margin system, futures have high leverage. Traders can buy and sell on the same day, supporting both long and short positions, with no limit on price movement restrictions.

Main differences between futures and stocks:

Compared to stock trading, futures have lower transaction costs, allow both long and short positions without needing special approval, and offer more flexible rules. However, this also means higher risks. Leverage can amplify profits but also losses. Incorrect market direction judgments can lead to margin calls or liquidation.

Key to successful trading:

To profit in the futures market, you must develop a comprehensive, executable trading system and strictly adhere to it. Rules and an effective trading system are the foundation of futures profitability.

IV. Types of Futures Contracts

The futures market offers a rich variety of underlying assets, mainly categorized into six groups:

Index futures: S&P 500, Nasdaq 100, VIX, Dow Jones Index
Interest rate futures: Government bonds (2-year, 5-year, 10-year, 20-year, etc.)
Grain futures: Wheat, corn, soybeans
Metal futures: Gold, silver, copper, platinum
Energy futures: Crude oil, heating oil, gasoline, natural gas
Soft commodities: Cotton, cocoa, coffee, sugar, orange juice

V. How to Start Participating in Futures Trading

Step 1: Build Basic Knowledge

Understand that futures contracts have expiration dates, require only margin to trade, feature leverage, and support both long and short positions.

Step 2: Assess Your Investment Style

Review past investment experience to determine if you are more suited for long-term or short-term trading. If you prefer long-term, futures can be used as a hedging tool; if short-term, futures can be your main trading instrument.

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

Main futures exchanges include Taiwan Futures Exchange, CME (Chicago Mercantile Exchange), NYMEX (New York Mercantile Exchange), COMEX (New York Commodities Exchange), and Singapore Exchange. Generally, investors need to open a futures account through a broker, who provides an electronic order system connected to the exchange.

In Taiwan, the variety of futures products is relatively limited—mainly Taiwan index futures and individual stock futures. Other futures like currency, metals, and energy have lower liquidity. International futures markets offer a much broader range. When choosing a broker, consider whether they offer multiple trading products, provide accurate and fast quotes, and have low transaction fees.

Step 4: Practice with a Demo Account

After opening an account, it’s recommended to practice with a demo account. Many platforms offer free virtual funds (usually tens of thousands of dollars), allowing traders to test strategies in a simulated environment.

Tip for beginners: Always set stop-loss and take-profit points during the demo phase and strictly follow them. Leverage can magnify gains and losses, so disciplined operation is crucial. Starting with mini futures is advisable.

Step 5: Select Trading Targets

After sufficient practice, if you find profitable or hedging strategies, consider entering the real market. First, understand the underlying asset and contract details—such as the underlying, expiration date, and contract specifications.

Step 6: Deposit Funds and Prepare Margin

Before trading, deposit the initial margin. Each futures product has different minimum margin requirements. For example, Taiwan index futures large contracts may require a margin of NT$306,000, while smaller contracts require NT$76,500. Specific requirements can be checked on the broker’s website or trading platform.

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

Finding trading signals is key to successful trading. Futures traders tend to focus on liquid underlying assets, especially near expiration (longer-dated contracts tend to have lower liquidity).

Traders analyze fundamentals, economic news, or technical indicators to forecast future price movements. For stock futures, research the companies and markets like stock analysis; however, since futures have expiration dates, it’s recommended to enter when technical signals are about to trigger, making market direction easier to grasp.

Step 8: Decide on Market Direction—Long or Short

Logic for going long futures:

Predicting asset price increases, e.g., buying crude oil futures if expecting oil prices to rise. If the price rises as expected, the contract’s value increases, and selling later yields profit. Similarly, if bullish on the US stock rebound, buy S&P 500 futures.

Logic for shorting futures:

If expecting a decline, sell first and buy back later at a lower price. For example, if expecting crude oil to plummet, sell oil futures; if the price drops as forecasted, the position gains value. Similarly, if expecting a stock market decline, sell S&P 500 futures.

Step 9: Set Stop-Loss and Take-Profit

Market volatility poses risks regardless of position. Setting reasonable stop-loss and take-profit points is essential.

Advice for beginners: Use relatively tight stop-losses and smaller positions initially. As experience grows, adjust stop-loss and take-profit levels based on market conditions.

VI. Advantages, Disadvantages, and Risk Assessment of Futures Trading

Advantages of Futures Trading

Leverage benefits: Futures offer leverage, allowing investors to control larger contract values with less capital, enabling small investments to generate significant returns.

Flexibility in long and short positions: Futures support both long and short trading. Unlike stocks, which can only be bought, short selling stocks is more complicated and involves borrowing costs; futures make shorting much easier.

Hedging capabilities: Investors holding physical assets can hedge against price fluctuations by shorting futures, protecting existing positions without selling the assets outright.

High liquidity: International futures markets are highly active, with excellent liquidity and transparency, making futures ideal for investors with ample funds seeking diverse investment options.

Disadvantages and Risks of Futures Trading

Leverage risk: Leverage can magnify both gains and losses, leading to highly volatile results. Without strict stop-loss and take-profit strategies, futures trading is very risky.

Unlimited liability risk: Unlike stocks, where the maximum loss is the invested capital, futures involve margin and leverage, meaning losses can exceed initial deposits, potentially leading to debt. Strict risk management is essential.

High entry requirements: Although margin trading requires less capital upfront, futures demand higher professional knowledge than stocks. Most participants are professional investors or institutions.

Contract specifications: Futures are standardized contracts with fixed quantities, expiration dates, and margin ratios. While mini and micro contracts exist, they still fundamentally involve straightforward long or short positions.

VII. Contract for Difference—A Flexible Derivative Tool

CFD (Contract For Difference) is a financial derivative combining features of futures and spot trading, making it more suitable for retail investors.

Definition of CFD

A CFD is an agreement between two parties to settle the difference between the opening and closing prices of an underlying asset, without physical delivery. It involves no expiration date and does not face forced settlement like futures.

Advantages over Futures

Wide range of trading instruments: Taiwan’s futures options are limited, but CFDs cover stocks, forex, cryptocurrencies, and commodities across various markets.

More flexible trading: CFDs theoretically have no delivery date, allowing indefinite holding without concerns about expiration or rollover. Contract specifications are more flexible, with minimum trading units and adjustable leverage—e.g., minimum 0.01 lot, leverage from 1x to 200x—far superior to fixed futures contracts.

Lower entry costs: Although CFDs also use margin and leverage, the entry costs are lower. The flexible leverage ratios mean less initial capital compared to futures’ higher margin requirements.

Key Points in CFD Trading

First priority—control leverage: Besides no expiration date, CFDs carry similar risks to futures. Leverage should be chosen based on the underlying asset’s volatility. Lower volatility currencies can use higher leverage; more volatile stocks or commodities should use lower leverage.

Second priority—comprehensive trading plan: While the trading logic is to buy low and sell high or vice versa, pre-establish stop-loss and take-profit mechanisms to maintain controlled risk and generate consistent returns.

VIII. Core Summary of Futures Education

Successful futures trading relies on three pillars:

Knowledge foundation: Deep understanding of futures mechanisms, contract details, and risk characteristics.

Systematic rules: Establish a complete, executable trading system including entry/exit signals, capital management, and risk control.

Psychological discipline: Strictly follow the trading plan, avoid emotional decision-making, and especially adhere to stop-loss rules during losses.

Futures trading is not a shortcut to quick profits but a professional skill requiring knowledge accumulation, experience, and mental resilience. Beginners should start with demo accounts, gradually gain experience, and only participate in live trading after fully understanding the risks.