Futures Trading Complete Guide | From Beginner Introduction to Practical Operations, Master Futures Strategies and Risks in One Article

Basic Understanding of Futures

What are futures? In simple terms, futures are contracts made between buyers and sellers on an exchange, agreeing to trade at a specific future date at a predetermined price. This contract specifies details such as the commodity code, trading specifications, minimum price fluctuation, trading hours, expiration date, and settlement method.

The underlying assets of futures are very diverse, including stock indices, foreign exchange rates, commodities, raw materials, bonds, and other financial products. In Taiwan, the most frequently traded futures are the Taiwan Weighted Index Futures (Taiwan Stock Index Futures).

Core Features of Futures Trading

Compared to stock investing, futures trading has several unique characteristics that need to be understood:

Margin Trading and Leverage Effect: You do not need to pay the full value of the contract; only a margin (usually 5%-20% of the contract value) is required to trade. This means controlling a larger contract value with less capital, offering the possibility of high returns with small investments.

Long and Short Trading: Futures can be bought (long position, expecting prices to rise) or sold (short position, expecting prices to fall). Unlike stock short selling, which requires borrowing shares and paying fees, shorting futures is relatively simpler.

Day Trading Flexibility: Futures can be bought and sold within the same day without applying for special qualifications, and trading rules are relatively flexible.

Expiration Date: Each futures contract has a clear expiration date, at which point it will be forcibly closed and settled. This differs from spot stocks, which can be held indefinitely.

Nine Practical Steps to Play Futures

Step 1: Build Basic Knowledge of the Futures Market

Before starting trading, you must understand that futures have expiration dates, require only margin payment, feature leverage, and can be traded both long and short.

Step 2: Confirm Your Trading Style

Review your past investment experience to determine whether you are suited for long-term investing or short-term trading. Long-term investors generally do not use futures as their main investment tool but rather for hedging.

Step 3: Open a Futures Trading Account

Futures are issued by various exchanges such as the Taiwan Futures Exchange, Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), etc. Investors need to open an account through a futures broker, which provides electronic order systems connecting to exchanges and clearinghouses.

Step 4: Use a Demo Account to Test Strategies

After opening an account, practice with a demo account using virtual funds to test whether your trading strategies can be profitable in the market and verify the feasibility of your trading system.

Step 5: Choose Futures Products to Trade

Futures underlying assets are mainly divided into six categories: index futures (S&P 500, NASDAQ 100, etc.), interest rate futures (various maturities of government bonds), grain futures (wheat, corn, soybeans), metal futures (gold, silver, copper), energy futures (crude oil, natural gas), and soft commodities (cotton, coffee, sugar).

Step 6: Prepare Sufficient Margin

Different futures contracts have different margin requirements. For example, large Taiwan index futures may require over NT$300,000 in initial margin, while gold futures are priced in USD. Before trading, check the specific margin requirements for the underlying asset and complete the deposit.

Step 7: Learn to Read Charts and Identify Trading Signals

Finding trading signals is key to success. Futures traders tend to prefer highly liquid assets and prioritize contracts nearing expiration (as far-term contracts tend to have lower liquidity). Use fundamental analysis, economic trends, or technical analysis to judge price movements. It’s recommended to enter when technical indicators are about to trigger, making it easier to grasp market direction.

Step 8: Decide Trading Direction and Execute

Go Long: If you expect the asset price to rise, buy futures contracts. For example, if bullish on oil prices, buy crude oil futures; if expecting a rebound in US stocks, buy S&P 500 futures.

Go Short: If you expect the asset price to fall, sell futures contracts. For example, if expecting a crash in oil prices, sell crude oil futures; if expecting a stock market decline, sell S&P 500 futures.

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

Market volatility poses risks whether buying or selling. Beginners are advised to set shorter stop-loss levels and smaller positions, then gradually adjust as experience grows. This is the most critical risk control mechanism in futures trading.

Advantages of Futures Trading

Leverage Effect: Control larger contract values with less capital, improving capital efficiency.

Convenience of Long and Short Operations: Compared to the complexity of short selling stocks, shorting futures is much simpler.

Hedging Tool: Use futures contracts to hedge existing positions, protecting investments during price fluctuations.

High Liquidity: International futures markets are highly active, with high liquidity and transparency, especially suitable for investors with larger capital.

Risks and Disadvantages of Futures Trading

Leverage as a Double-Edged Sword: Leverage amplifies both gains and losses. Investors without strict stop-loss and take-profit plans can face significant losses.

Unlimited Liability Risk: Unlike stocks, where the maximum loss is the invested capital, futures require only margin payment but involve leveraged exposure. In extreme volatility, investors may even owe money to the broker.

High Entry Barriers and Professional Requirements: Although margins are low, futures trading is much more professional than stock investing, often involving institutional or professional investors.

Rigid Contract Specifications: Futures are standardized contracts with fixed quantities, expiration dates, and margin ratios, offering less flexibility than other derivatives.

Conditions for Success in Futures Trading

To profit in the futures market, establishing a comprehensive and executable trading system is crucial. The system should include:

• Clear entry signal identification
• Scientific position management
• Strict stop-loss and take-profit rules
• Proper use of risk management tools

Most importantly, discipline in executing the trading system without changing strategies due to market emotions. Only by establishing rules and sticking to an effective trading system can consistent profitability be achieved.

For beginners, it is recommended to start with theoretical learning, practice thoroughly with a demo account, and after understanding market rules and risks, proceed with small real trades to gradually accumulate experience and confidence.