Must-read before trading futures | Futures trading risks, operation procedures, and advanced guide

I. The Most Common Mistakes Made by Futures Beginners

Many people are attracted by the high leverage of futures, thinking that they can control large positions with a small amount of capital, only to lose everything in the end. Why does this happen? Because most beginners overlook a core fact: Futures are not a tool for quick profits, but a financial derivative that requires a complete trading system to achieve long-term profitability.

The danger of futures lies in the leverage effect being a double-edged sword. It can amplify profits but also magnify losses. If you do not set stop-loss points and strictly follow them, losses will continue to accumulate, and you might even end up owing money to the broker—something that never happens when buying stocks.

II. What Exactly Are Futures? How Do They Differ from Spot and CFDs?

Futures are contracts where both parties agree to buy or sell at a specific future date at a price agreed upon now. The exchange stipulates all contract details: product code, trading volume, minimum price fluctuation, trading hours, expiration date, settlement method, etc.

The underlying assets of futures can be commodities (oil, gold, grains), indices (Taiwan Weighted Index, S&P 500), foreign exchange, bonds, or other financial assets. Simply put, buyers and sellers post prices on an exchange, and the system automatically matches trades.

Futures vs Spot vs CFD:

• Futures: Have fixed expiration dates, must be traded according to specifications (except mini and micro contracts), require higher margin but have the highest liquidity
• Spot: Buying and selling physical commodities or stocks, no leverage risk, but require full payment
• CFD (Contract for Difference): No expiration date, flexible leverage (1-200x), a wide range of trading products, lower entry cost

All three use margin trading and carry leverage risks, but CFDs are more friendly to retail traders.

III. The Real Costs of Futures Trading

Before starting with futures, you need to understand the cost structure. Each futures contract requires a margin—this is not the purchase price but a trading security deposit.

For example, in Taiwan Yuan Tai Futures:

• Large Taiwan Index Futures: initial margin NT$306,000
• Mini Taiwan Index Futures: initial margin NT$76,500
• Nasdaq 100 Futures: initial margin NT$98,000
• Brent Crude Oil Futures: initial margin NT$54,000

Margin is just the entry fee. You also need to consider transaction fees, slippage costs, and potential margin calls in extreme market conditions. When your losses reach a certain level, the broker will require additional margin; otherwise, positions will be forcibly closed.

IV. 9 Core Steps to Trading Futures

1. Establish Your Trading Attributes

Ask yourself: Are you a long-term investor or a short-term trader?

If you prefer holding stocks long-term, futures may not be suitable as a primary tool, only as a hedging tool. If you are a short-term trader, futures’ flexibility (can buy and sell on the same day, long and short) can be fully utilized.

2. Understand the Basic Characteristics of the Futures Market

Remember three points:

• Futures contracts have a expiration date, and must be settled upon expiry
• Trading only requires margin, with leverage built-in
• Both long and short positions are easy to operate

3. Choose a Suitable Futures Broker to Open an Account

Futures contracts are issued by exchanges (such as Taiwan Futures Exchange, CME, NYMEX), but retail investors generally place orders through a broker’s futures department.

Taiwanese Futures Brokers: Yuanta, KGI, Fubon, Cathay, etc. International Futures Brokers: Mitrade, E-trade, TD Ameritrade, Interactive Brokers, etc.

Criteria for choosing a broker: wide product variety, fast and accurate quotes, low commissions. Taiwanese brokers mainly offer Taiwan index and stock futures; international brokers provide a much broader selection.

4. Verify Your Trading System with a Demo Account

After opening an account, don’t rush to deposit real money. Use demo funds to practice and verify whether your trading strategy can truly make money. During this phase, focus on:

• Familiarizing yourself with the trading platform
• Testing entry and exit signals
• Experiencing psychological resilience under different market conditions

5. Decide on Futures Products to Trade

Futures are mainly divided into six categories: indices, currencies, interest rates, metals, energy, agricultural products.

Popular choices include:

• Index: S&P 500, Nasdaq 100, Taiwan Weighted Index
• Energy: Crude oil, natural gas
• Metals: Gold, silver, copper
• Grains: Wheat, corn, soybeans

When selecting underlying assets, consider liquidity—near-month contracts usually have the strongest liquidity, while longer-dated contracts tend to be less liquid.

6. Deposit Funds and Plan Your Positions

After choosing the products to trade, calculate how much margin you need. Beginners are advised to start with mini contracts to reduce single-trade losses.

For example, trading Taiwan index futures:

• A standard contract requires NT$300,000+, a 5,000-point loss equals NT$15,000
• A mini contract requires NT$75,000, a 5,000-point loss equals NT$1,500

Practicing with small positions allows you to test strategies with peace of mind and manageable losses.

7. Learn to Read the Market and Capture Trading Signals

Futures traders typically analyze through three methods:

• Fundamental analysis: Study economic data and policy trends
• Technical analysis: Read candlestick charts, moving averages, indicators
• News analysis: Track important economic events

If trading stock futures, the analysis methods are similar to stock picking. But because futures have expiration dates, it’s recommended to enter when technical signals are about to trigger, making market direction easier to grasp.

8. Execute Long or Short Strategies

Going long (buying on bullish outlook):

• Expect oil prices to rise → buy crude oil futures → close position for profit when prices go up
• Expect US stocks to rebound → buy S&P 500 futures → sell when the market rises

Going short (selling on bearish outlook):

• Think oil oversupply → sell crude oil futures → close position for profit when prices fall
• Worry about stock market decline → sell S&P 500 futures → buy back when the market drops

The advantage of futures is that going short and long is equally easy, unlike stocks which require borrowing shares.

9. Set Stop-Loss and Take-Profit, and Follow Discipline Rigorously

This is the most crucial step and the one 99% of losers neglect. Whether buying or selling, always set stop-loss and take-profit points before placing orders.

Beginners should set shorter stop-loss levels and smaller positions:

• If losses exceed 2-3% of your account, stop immediately
• When profits reach your target, take profits promptly—avoid greed

As you gain experience, you can adjust according to market volatility. But initially, develop the habit of discipline first.

V. The Four Major Advantages and Disadvantages of Futures

Advantages of Futures

✓ Leverage amplifies gains: Control large positions with small capital, achieving big gains from small investments

✓ Flexible long and short: No need to borrow shares; going short and long is equally simple

✓ Hedging risk: Can short futures to hedge against stock declines

✓ High liquidity: International futures markets trade frequently, with quick execution

Risks of Futures

✗ Leverage is a double-edged sword: Profits and losses are magnified; without stop-loss, you risk losing everything

✗ Unlimited liability for losses: Unlike stocks, where the maximum loss is your initial capital, futures losses can exceed your deposit and you may owe money to the broker

✗ High entry barrier: Although margin requirements are lower, the required professional knowledge is much higher than stock investing

✗ Standardized contracts: Futures are standardized products, lacking flexibility

VI. CFD—An Alternative Combining the Advantages of Futures and Spot

If the high risk of futures deters you, consider CFDs (Contracts for Difference). CFDs are contracts between two parties that settle only the price difference, without physical delivery, and have no expiration date.

Advantages of CFDs over futures:

▪ Wide range of trading products: Not only futures indices but also stocks, forex, cryptocurrencies—over 400 options

▪ No expiration time: Can hold positions indefinitely without rollover concerns

▪ Flexible leverage: Supports 1-200x leverage, with lower initial margin requirements

▪ Lower entry cost: Easier for beginners, with minimum trade sizes starting from 0.01 lot

Key points for CFD trading:

1. Control leverage ratio: Use smaller leverage for volatile assets (stocks, commodities), larger for less volatile ones (forex)

2. Develop a comprehensive trading plan: Set entry/exit points, stop-loss, take-profit before opening positions to ensure risk control

Regardless of choosing futures or CFDs, the core principle remains—without a complete trading system and disciplined execution, stable profits are impossible. Spend time practicing on demo accounts before risking real money; it’s far more cost-effective.