Futures Trading from Beginner to Expert | The Complete Guide Every Newbie Must Read

What Are Futures? Understanding the Core Concepts First

Futures are standardized contracts that represent an agreement between a buyer and a seller to trade a specific underlying asset at a predetermined price on a future date. In simple terms, it’s a contract signed now with delivery or settlement scheduled for the future.

The biggest feature of futures is the use of margin system, which requires only a small portion of the contract value as margin to control a position much larger than the invested capital. This leverage characteristic is both the appeal and the risk of futures.

Unlike stock trading, futures trading has the following features:

• Must settle or close the position on the specified date
• Easy to short sell without borrowing securities
• Low transaction fees
• Flexible trading hours, no need for special approval for day trading

What Can You Trade in Futures? An Overview of the Six Major Underlying Categories

What is the underlying asset of a futures contract? Simply put, it is the specific asset that the futures contract corresponds to. The futures market offers a rich variety of underlying assets:

Index Futures: S&P 500, NASDAQ 100, Taiwan Weighted Index, Nikkei 225, etc.

Metal Futures: Gold, Silver, Copper, Platinum, and other precious and industrial metals

Energy Futures: Crude Oil, Natural Gas, Gasoline, Heating Oil, etc.

Agricultural Futures: Wheat, Corn, Soybeans, Cotton, Coffee, Sugar, etc.

Interest Rate Futures: Various maturity government bond futures, Eurozone interest rate futures, etc.

Currency Futures: Futures contracts for major currency pairs

In Taiwan, the most traded is TAIEX Futures (based on Taiwan Stock Exchange Weighted Index). To trade futures on global markets, you need to go through international futures brokers.

What’s Inside a Futures Contract? Detailed Contract Elements

Exchanges specify all details of each futures contract, and investors must fully understand these before trading. Contract details typically include:

For example, in Taiwan, large TAIEX futures require a margin of about NT$300,000, while mini TAIEX futures require about NT$75,000. Margin requirements vary significantly across different products.

Seven Key Points to Know Before Entering the Market

Before trading futures, keep these points in mind:

1. Futures Have a Clear Expiration Date — Unlike stocks, which can be held indefinitely, futures contracts must be settled or closed before expiration; otherwise, they will be forcibly settled.

2. Leverage Is a Double-Edged Sword — Leverage amplifies both gains and losses. Wrong directional judgment can lead to losses exceeding your initial investment.

3. Insufficient Margin Will Trigger Margin Calls — When losses reach a certain level, brokers will require additional margin. Failure to top up can result in forced liquidation.

4. Both Long and Short Positions Are Possible — You don’t have to wait for an upward trend; you can profit from a downtrend as well.

5. Day Trading Carries High Risks — Frequent trading with high leverage is a primary cause of futures losses.

6. A Complete Trading System Is Necessary — Futures trading is not about luck; it requires proven strategies, strict risk management, and disciplined execution.

7. What Is the Core Risk of Futures? — Unlimited loss liability. Unlike stocks, where the maximum loss is the invested capital, futures can result in losses far exceeding the margin, potentially owing money to the broker.

How to Start Trading Futures as a Beginner? Nine Step-by-Step Guide

Step 1: Understand the Basic Rules of the Futures Market

Before entering the market, grasp how the futures market operates. Futures exchanges set the rules, brokers provide trading platforms, and investors execute trades through brokers. Different exchanges have different contract specifications, and the same underlying may vary across exchanges.

Step 2: Assess Your Investment Style

Long-term investors should use futures mainly for hedging (defensive purposes), not as their primary investment tool. Short-term traders are more suited for frequent entry and exit. Honestly evaluate your trading experience and psychological readiness.

Step 3: Choose the Right Futures Broker

Taiwanese investors can select domestic futures brokers (like Yuanta, KGI, Capital Securities, etc.) to trade TAIEX futures or go through international brokers for global products. When choosing a broker, consider:

• Variety of trading instruments
• Market data speed
• Commission rates
• Customer support quality
• Platform usability

Step 4: Practice with a Demo Account

Before depositing real funds, practice trading with a demo account. Test your strategies, experience real market volatility, and develop psychological resilience for risk.

Step 5: Decide Which Futures to Trade

Determine which type of futures you want to trade—index futures or commodity futures? Domestic or international markets? Different assets have distinct volatility and liquidity profiles, requiring tailored strategies.

Step 6: Prepare Sufficient Margin and Deposit Funds

Each futures contract has a minimum margin requirement. It’s advisable not to deposit only the minimum but to have extra funds to handle market fluctuations, avoiding frequent margin calls. Adequate capital allows you to respond calmly to market changes.

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

Futures traders tend to focus on highly liquid contracts (usually near-expiry contracts). Finding reliable signals is key to profitability. Use technical analysis, fundamental analysis, or economic news to judge price trends. Enter trades when technical signals are about to trigger, as this improves the chances of correctly gauging market direction.

Step 8: Decide to Go Long or Short

Long: Expect price rise, buy the contract first, and sell later for profit. For example, if bullish on US stocks, buy S&P 500 futures.

Short: Expect price decline, sell the contract first, and buy back later to realize profit. For example, if worried about oil prices crashing, sell crude oil futures.

Step 9: Set Stop-Loss and Take-Profit Points

Market volatility can reverse positions at any time. Always pre-set stop-loss (to limit losses) and take-profit (to lock in gains) levels before entering a trade. For beginners, it’s recommended to set tighter stop-losses and smaller positions, then adjust as experience grows.

Comprehensive Analysis of the Pros and Cons of Futures Trading

Main Advantages of Futures

Clear Leverage Effect — Control larger contracts with less capital, making capital utilization far more efficient than stocks.

Flexibility to Trade Both Directions — Stocks can only be bought, and short selling is more complicated. Futures allow both long and short positions freely, enabling profits in declining markets.

Low Transaction Costs — Futures trading costs are much lower than stocks, suitable for frequent traders.

High Liquidity — International futures markets have large trading volumes, making entry and exit easy without liquidity concerns.

Hedging Tool — Use futures to offset risks in existing stock investments.

Main Risks of Futures

Leverage Risk — Amplifies both gains and losses. Without strict discipline, losses can escalate rapidly.

Unlimited Loss Risk — The most frightening aspect. Unlike stocks, where losses are capped at the invested capital, futures can lead to losses exceeding the margin, owing money to the broker.

Expiration Risk — Positions must be closed or rolled over before expiration; cannot hold indefinitely like stocks.

High Skill Requirement — Futures trading demands higher professional knowledge and psychological resilience; not suitable for complete beginners.

Standardized Contracts — Futures are standardized, inflexible contracts; only long or short positions are possible, lacking customization.

CFD (Contract for Difference): A Middle Ground Between Futures and Spot Trading

If you find futures too risky, consider CFD. CFDs are contracts between buyers and sellers that track the spot price, settling gains or losses via price difference, without physical delivery.

Advantages of CFDs Compared to Futures

Wide Range of Instruments — Unlike futures, which are limited by exchange rules, CFDs offer hundreds of underlying assets, including stocks, forex, cryptocurrencies, commodities, etc.

No Expiration Date — CFDs can theoretically be held indefinitely, avoiding issues like contract expiration or rollover.

More Flexible Specifications — Leverage can be adjusted (e.g., 1-200x), and trading sizes are more granular (e.g., 0.01 lot), suitable for small investors.

Lower Entry Costs — Margin requirements are more flexible, requiring less upfront capital than futures.

Key Points for CFD Trading

Choose Leverage Carefully — For volatile assets (like stocks, energy), use lower leverage; for less volatile assets (like currencies), higher leverage may be appropriate. Higher leverage increases risk.

Develop a Complete Trading Plan — Include entry points, exit points, stop-loss, and take-profit levels. Discipline in execution is more important than precise prediction.

Control Single-Trade Risk — Limit maximum loss per trade to around 2% of total capital to withstand multiple failures.

Final Advice: The Key to Success in Futures Is System and Discipline

Whether trading futures or CFDs, what is the foundation of successful trading? The answer is: a complete and effective trading system combined with ironclad discipline.

Many investors are attracted by the leverage of futures but lose money due to lack of systematic methods and self-control. There are no guaranteed winning trades; only strategies with higher probabilities.

Before real trading, it’s recommended to:

1. Fully test your strategies on a demo account
2. Start with minimal positions and gradually increase
3. Strictly adhere to predefined stop-loss and take-profit levels
4. Regularly evaluate performance and optimize strategies

Only through disciplined, systematic practice can you achieve consistent profits in the futures market.