Futures Trading Depth Guide | Master the Key to Leveraged Investing from Scratch

I. The Core Logic of Futures Trading

What is the essence of futures trading? Simply put, it is a trading method conducted through contracts. Buyers and sellers on the exchange platform agree to deliver or receive the underlying asset at a predetermined price on a specific future date. Unlike spot trading, futures involve leverage—investors only need to pay a margin to control a contract value far exceeding the margin amount.

The underlying assets of futures are extremely diverse, covering indices, exchange rates, interest rates, precious metals, energy, agricultural products, and more. In the Taiwan market, the most actively traded futures are based on the Taiwan Weighted Index (TAIEX futures).

II. The Key Differences Between Futures and Spot Trading

Many investors are accustomed to traditional stock investing, but futures introduce a completely new operational logic. The key distinctions are:

Trading Flexibility: Futures support both long (buying in anticipation of price increases) and short (selling in anticipation of price decreases) positions, enabling two-way trading. In contrast, short selling stocks requires applying for margin and paying borrowing fees. Futures allow direct contract selling, making operations more convenient.

Trading Costs: Futures commissions are much lower than stocks, and liquidity is higher. International futures markets, in particular, feature high trading frequency and transparency.

Time Limits: Each futures contract has a clear expiration date. Investors must close or roll over their positions before expiry, which contrasts sharply with stocks that can be held indefinitely.

III. Key Points and Risks in Futures Trading—What You Must Know

The appeal of futures lies in leverage, but this is also its greatest risk.

The Double-Edged Nature of Leverage: Margin systems allow investors to control large contracts with small capital, amplifying profits but also magnifying losses. If the market moves against expectations, losses can quickly erode the margin and even lead to a margin call.

Potential for Unlimited Losses: Unlike stocks, where the maximum loss is the invested capital, futures require only a margin deposit. In extreme market volatility (such as flash crashes), investors may face losses exceeding their margin, even owing money to the broker.

Psychological Challenges: High-frequency intraday trading and high leverage often lead to emotional decision-making. Traders chasing gains or cutting losses impulsively tend to lose money faster. Strict discipline, setting stop-loss and take-profit points, and adhering to rules are essential for survival.

IV. What Does a Futures Contract Contain?

Futures exchanges specify standardized contract details. When opening an account, investors should fully understand:

• Product Name and Code: For identifying the underlying asset
• Contract Specifications (Trading Volume): The quantity of the underlying per contract
• Minimum Price Fluctuation: The smallest profit or loss per trade
• Trading Hours: Varies depending on the asset type
• Expiration Date: The date for mandatory settlement
• Settlement Method: Cash settlement or physical delivery

For example, in Taiwan, large TAIEX futures require a margin of about NT$306,000, while smaller contracts need around NT$76,500. Margin requirements vary significantly across different underlying assets, so investors should choose contracts suitable for their capital.

V. The Complete Process of Futures Trading

Step 1: Understand the Market and Self-Assessment

Before investing, understand the core features of futures: contracts have expiration dates, margin systems, high leverage, and support both long and short positions. Honestly evaluate your investment style—long-term investors generally should not rely on futures as their main tool, but rather use them for hedging.

Step 2: Choose a Futures Broker and Open an Account

Futures are issued by various exchanges (e.g., CME, NYMEX). Retail investors typically open futures accounts through mainstream brokers. A good broker should offer accurate and fast quotes, low commissions, and a wide range of trading products.

In Taiwan, the available futures products are limited. To trade international futures (such as US indices, crude oil, gold), choose brokers that provide international futures services.

Step 3: Practice with Simulated Trading

After opening an account, it’s essential to practice with a demo account. Use virtual funds to test your trading logic and verify system feasibility. Focus on testing stop-loss and take-profit settings, as disciplined execution is key to profitability in futures.

Step 4: Confirm Trading Assets and Deposit Funds

Once comfortable with simulated trading, deposit margin into your real account. Check the margin requirements for your chosen futures products. For example, trade domestic stock index futures through local brokers; for US indices or crude oil, select international brokers.

Step 5: Learn to Identify Trading Signals

Futures traders usually prefer contracts with high liquidity (near expiration contracts are more liquid than distant ones). Trading signals come from fundamental analysis, economic trends, or technical analysis. For stock futures, investors should study company and market trends, entering when technical signals indicate a potential move, making it easier to grasp market direction.

Step 6: Execute Long or Short Strategies

Long Position: Expect asset prices to rise; buy futures contracts. For example, if anticipating oil prices to increase, buy crude oil futures; if optimistic about a rebound in US stocks, buy S&P 500 futures.

Short Position: Expect asset prices to fall; sell futures contracts first, then buy back at lower prices. For example, if expecting a crash in oil, short crude futures; if worried about continued stock declines, short US stock index futures.

Step 7: Strictly Implement Risk Management

Regardless of your position, always set stop-loss and take-profit points when placing orders. For beginners, it’s advisable to set tighter stop-loss levels and smaller positions, then gradually adjust as experience grows. Many failures in trading stem from neglecting risk management, leading to single losses wiping out multiple gains.

VI. Weighing the Pros and Cons of Futures Trading

Main Advantages of Futures

Leverage Effect: Control large contract values with relatively small capital, enabling high returns on small investments—especially attractive for investors with limited funds.

Two-Way Trading: Unlike stocks, where short selling is restricted (requiring borrowing and fees), futures make shorting extremely easy, allowing quick deployment of defensive strategies during market volatility.

Hedging Capabilities: Investors holding stock positions can hedge against price fluctuations by shorting futures, locking in risks without closing positions immediately.

Market Liquidity: International futures markets are highly active, with continuous quotes and high transparency, suitable for large capital seeking ample trading opportunities.

Major Risks of Futures

Leverage Risk: Leverage amplifies both profits and losses. Losses can occur much faster than in stocks. Without strict stop-loss discipline, capital can be wiped out rapidly.

Unlimited Liability: Stocks can only lose the invested capital, but futures margin systems can lead to losses exceeding the initial deposit, even owing money to the broker in extreme cases.

Entry Barriers: Although margin requirements are relatively low, futures are more professional and complex than stocks. Most participants are professional investors or institutions; retail investors need thorough preparation.

Fixed Contract Specifications: Futures are standardized products with predefined quantities, expiration dates, and margin ratios. Investors can only buy or sell within these frameworks, lacking flexibility.

VII. CFD (Contract for Difference)—A Hybrid of Futures and Spot Trading

CFD is a product that combines features of futures and spot trading, gaining popularity among retail investors in recent years.

How CFDs Work: Both parties agree to track the spot price, settling the profit or loss based on the price difference. The process does not involve physical delivery and has no fixed expiration date.

Three Major Advantages of CFDs over Futures

Wide Range of Products: Taiwan’s futures options are limited; CFD platforms typically offer over 400 trading instruments, including stocks, forex, cryptocurrencies, commodities, and more.

Flexible Trading: CFDs can theoretically be held indefinitely without concerns about expiration or rollover. They offer flexible specifications (e.g., minimum trade size from 0.01 to 30 lots, leverage from 1-200x). In contrast, futures contracts have fixed, rigid specifications.

Lower Costs: While margin trading is similar, CFDs generally have lower initial costs, and leverage options are more flexible, not constrained by the high margin ratios typical of futures.

Core Points of CFD Trading

Leverage Control: CFDs involve leverage risk; adjust leverage according to the underlying asset’s volatility. Low-volatility assets (like forex) can use higher leverage; high-volatility assets (like stocks or commodities) should use lower leverage.

Comprehensive Trading Plan: Before trading, develop detailed strategies and risk management plans. Stop-loss and take-profit mechanisms are essential to sustain profits within manageable risks.

Conclusion

Futures trading is a double-edged sword. Investors who master leverage can achieve rapid wealth growth, but improper operation can lead to swift losses. Successful futures traders share a common trait: a complete, executable trading system + ironclad discipline. Whether you choose futures or CFDs, first familiarize yourself through simulated trading, set stop-loss and take-profit levels, and never compromise—these are the fundamental rules for survival and profit in futures trading.