Futures Trading Basics | How Beginners Can Start Trading Futures? Risk Assessment and Practical Guide

1. What is Futures? Basic Concept Analysis

What are futures? In simple terms, futures are standardized contracts where both parties agree on a specific future date to deliver and receive an underlying asset at a predetermined price. The underlying can be stock indices, crude oil, gold, foreign exchange, bonds, and various financial or physical commodities.

The core features of futures trading: After the buy and sell orders are matched on the exchange, the contract records a clear expiration date, at which point settlement must occur (physical delivery or cash settlement). The most popular futures trading product in Taiwan is the Taiwan Index Futures based on the weighted index, which is also the market most retail investors are exposed to.

2. Overview of Futures Contract Details

Each futures contract is defined with detailed specifications by the exchange, including:

• Underlying product code and name
• Contract size (trading volume specifications)
• Minimum price tick (smallest price movement per change)
• Trading hours
• Expiration and delivery date
• Settlement method (physical or cash)

For example, Taiwan’s large-cap Taiwan Index Futures require an initial margin of about NT$300,000; mini Taiwan Index Futures require around NT$76,000; foreign futures like Nasdaq 100 futures, Brent crude oil futures, etc., have varying margin requirements. Investors should carefully check the contract specifications of the products they plan to trade before opening an account.

3. Five Key Points to Know Before Playing Futures

Investors must understand the following concepts before entering:

1. Margin Trading Characteristics: Futures operate on a margin system, requiring only a fraction (usually 5-10%) of the contract value to trade the full contract, which introduces leverage.

2. Two-way Flexibility: You can go long (buy expecting prices to rise) or short (sell expecting prices to fall), without needing to apply for day trading qualifications like stocks.

3. High Leverage Amplification: Leverage is a double-edged sword; profits and losses are magnified. Incorrect judgments can lead to margin calls or even forced liquidation.

4. Contract Expiration: Futures have a clear expiration date. Near-month contracts have the best liquidity, while longer-term contracts tend to be less liquid.

5. Advantages over Stocks: Lower transaction costs, flexible trading, but stricter risk management requirements.

Compared to stock investing, futures trading may seem accessible, but it requires higher professional knowledge and discipline. Many beginners are attracted by leverage but end up losing due to poor risk management. To survive and profit in the futures market, establishing a systematic trading strategy and strictly executing it is the key to long-term success.

4. How to Operate Futures? Eight Key Steps for Beginners

Step 1: Build a Market Awareness Foundation

Before actual trading, understand the operation logic of the futures market: margin requirements, leverage mechanisms, contract expiration, and exchange trading rules. Only with these fundamentals can you make more rational trading decisions.

Step 2: Clarify Your Investment Style

Review past investment experience to determine if you prefer long-term holding or short-term trading. Long-term investors generally should not use futures as their main tool, viewing it more as a hedging instrument; short-term traders can fully utilize futures’ flexibility.

Step 3: Choose the Right Futures Broker

Futures are issued by various exchanges (e.g., Taiwan Futures Exchange, CME Chicago, NYMEX New York, etc.), and investors need to open accounts through a broker’s futures department. When selecting a broker, consider product diversity, quote speed, commission levels, customer support, etc. In Taiwan, brokers include Yuanta, KGI, Fubon, etc.; international platforms offer multiple options.

Step 4: Use Demo Accounts to Test Strategies

After opening an account, do not trade with real funds immediately. Practice with a demo account using virtual funds to test whether your trading strategies are feasible. During this phase, develop habits like setting stop-loss and take-profit orders. Beginners are advised to practice with mini futures.

Step 5: Select Futures Underlying Assets Carefully

The market offers a rich variety of futures:

Beginners are recommended to start with highly liquid index futures or major commodity futures.

Step 6: Prepare Sufficient Margin

Before trading, deposit margin funds. Different products have different margin requirements; for example, large-cap Taiwan Index Futures may require hundreds of thousands NT dollars, while micro contracts have lower margins. Check the specific margin requirements of your chosen products before depositing.

Step 7: Learn to Recognize Trading Signals

Successful futures trading hinges on identifying reliable entry signals. Traders typically analyze fundamentals (economic data, policy changes) or technical indicators (candlestick patterns, technical indicators, chart formations) to determine price direction. Since futures have expiration dates, it’s advisable to enter positions when technical signals are about to trigger, increasing the probability of correct timing.

Step 8: Execute Buying and Selling Strategies

Long Strategy: Expect the underlying to rise, buy contracts first, then sell for profit as prices increase. For example, if bullish on US stocks, buy S&P 500 E-mini futures; if bullish on oil, buy crude oil futures.

Short Strategy: Expect the underlying to fall, sell contracts first, then buy back at lower prices for profit. For example, if anticipating a stock market correction, sell index futures to short.

Risk Management: Whether long or short, set clear stop-loss and take-profit points. Newcomers should adopt tighter stop-losses and smaller positions, adjusting gradually with experience.

5. Opportunities and Risks in Futures Trading

Main Advantages of Futures

Leverage Amplifies Returns: Control large contracts with small capital, achieving high returns on invested capital.

Two-way Trading Convenience: Going long or short is equally simple, without borrowing stocks, surpassing the one-directional limitation of stock markets.

Hedging Tool: Use futures short positions to offset spot market long positions, protecting existing portfolios.

High Liquidity: International futures markets are highly active, with transparent pricing, facilitating large capital inflows and outflows.

Main Risks of Futures

Leverage Risks Are Deadly: Leverage magnifies both profits and losses. Wrong direction judgment without strict stop-loss can lead to rapid losses.

Unlimited Loss Potential: Unlike stocks, where the maximum loss is the invested capital, futures require only margin, and losses can theoretically exceed initial deposits, even owing money to brokers.

High Professional Threshold: Futures demand higher market knowledge and operational skills, unsuitable for complete beginners.

Standardized Contracts: Lack of flexibility; trading volume and expiration are predefined, with no room for customization.

Time Pressure: Contracts have expiration dates, requiring constant attention to rollover issues, adding psychological stress.

6. Contract for Difference (CFD) – Retains Futures Advantages, Lowers Entry Barriers

CFD is a financial derivative between futures and spot trading. Buyers and sellers agree on the current spot price of the underlying, settling only the price difference, without physical delivery or fixed expiration.

Advantages of CFDs over Futures

Rich Underlying Options: Far more diverse than futures, including stocks, forex, cryptocurrencies, commodities, with over 400 assets.

Flexible Contract Specifications: Leverage ratios can be freely adjusted (typically 1-200x), trading lots from 0.01 to 30 lots, catering to different risk preferences.

Lower Margin Costs: Easier entry, high leverage flexibility, not limited by high futures margin requirements.

No Delivery Date: Can theoretically hold positions indefinitely, avoiding rollover and expiration issues, suitable for medium to long-term holdings.

Core Points for CFD Trading

1. Be Cautious with Leverage Choose leverage based on the volatility of the underlying. Low-volatility assets like forex can use higher leverage; high-volatility assets like stocks or commodities should use lower leverage to control risk.

2. Develop a Complete Trading Plan Clear entry logic, stop-loss, and take-profit mechanisms are essential. It’s not just about buying low and selling high; set risk-reward ratios to generate profits within manageable risk levels.

7. Final Advice and Risk Warning

Futures and CFDs are high-risk financial instruments, unsuitable for investors without adequate preparation. Before entering, do the following:

1. Deeply learn market fundamentals and risk management
2. Practice thoroughly with demo accounts to verify your trading logic
3. Establish strict trading discipline, including mandatory stop-loss orders
4. Control risk per trade (recommend not exceeding 2-5% of your account)
5. Do not be fooled by leverage and high return promises; stability always beats explosive gains

Long-term survival in the futures market depends not on luck but on systematic methodology and disciplined execution. Avoid blind entry; start with simulated trading and gradually accumulate real trading experience.