Starting from Zero: The Core Mechanics and Practical Guide to Trading Futures

The Essence of Futures: Why It’s Called the “Double-Edged Sword” for Investors

When it comes to how to trade futures, many beginners’ first reaction is “This is too dangerous.” But the truth is, futures are neither gambling tools nor guaranteed money-losing traps — their risks and rewards depend entirely on how you use them.

Futures are essentially contracts. You and the counterparty agree to buy or sell an asset at a specified price on a future date. What’s the benefit of doing this? Farmers no longer need to worry about their crops losing value at harvest, and merchants can lock in costs and plan ahead. This mechanism has existed since ancient times, evolving now into financial derivatives.

The key difference is: Buying stocks requires full payment, while futures only require a margin. For example, controlling a 1 million futures contract might only need a margin of 50,000 to 100,000. That’s the power of leverage — using a small amount of money to control large funds.

How to Trade Futures: From Opening an Account to Placing Orders

Step 1: Choose a suitable futures broker

The global futures market is dominated by different exchanges, such as CME (Chicago Mercantile Exchange), NYMEX (New York Mercantile Exchange), and Singapore Exchange in Asia. You need to find a reputable futures broker with low fees and fast quotes to open an account.

When choosing, consider three points:

• Is the trading variety rich enough (indices, exchange rates, metals, energy, agricultural products, etc.)
• Is the platform stable and secure
• Are the margin requirements and fees reasonable

Step 2: Understand the assets you want to trade

S&P 500 futures are suitable for investors bullish on US stocks, Dow Jones futures track industrial companies, crude oil futures are closely related to the global economic cycle. Each asset has different volatility characteristics — low exchange rate volatility allows high leverage, but commodities like oil and soybeans are more volatile, so use lower leverage.

Step 3: Practice with a demo account first

Most platforms offer free demo trading. This step is crucial because you need to verify whether your trading strategy can be profitable with virtual funds. Common mistakes for futures beginners — no stop-loss or take-profit, over-leverage, following the herd — all need to be exposed at this stage.

Step 4: Develop trading rules and strictly follow them

This is more important than the amount of capital. You should set in advance:

• Maximum loss per trade (stop-loss)
• Profit target to close the position (take-profit)
• Leverage limit per trade
• Overall risk exposure limit of your account

Many people lose money because they lack this discipline.

Step 5: Fund your account and start trading

When you consistently profit in the demo account, it indicates your strategy is viable. You can then deposit real funds, but it’s recommended to start with small capital.

How to Trade Futures: Two Core Methods

Going Long: Betting on Price Rise

Suppose you believe the US stock market will rebound (e.g., the Fed injecting liquidity to rescue the market), you can buy S&P 500 futures or Dow Jones futures. If the US stocks indeed surge, your contract value will rise, and you can profit by selling.

The same applies to crude oil. If you predict oil prices will rise, buy CME crude oil futures. For every $1 increase per barrel, your profit increases.

Going Short: Betting on Price Drop

If you think a market will decline, futures allow you to profit from it — something stock markets can’t do easily (shorting stocks requires borrowing shares, which is costly and risky).

For example, if you expect US stocks to fall due to tightening policies, sell S&P 500 futures. If the price indeed drops, you can buy back the contract at a lower price, earning the difference.

Core Differences Between Futures and Spot Trading

Spot trading involves buying or selling actual assets — if you buy stocks worth 1,000 yuan, you pay 1,000 yuan and receive the stock. Futures are different:

Three Major Advantages of Futures Investment

1. Leverage amplifies returns

A 1 million yuan move can bring a profit of 500,000 yuan. This is very attractive for retail investors with limited capital.

2. Both long and short trading

Most stock investors wait for rises, but futures let you profit from declines too. Even in a bad market, there are opportunities.

3. Hedging risks

If you hold Apple stocks but fear a market downturn, you can short S&P 500 futures. If the market crashes, the profit from futures can offset stock losses.

Risks of Futures: Why Some End Up Owing Money

Leverage risk: amplified gains, amplified losses

This is the biggest pitfall. 20x leverage means:

• If the market rises 5%, you earn 100%
• If it falls 5%, you lose 100%

But the market can fall more than 5%. If it drops 10%, you not only lose your entire principal but also owe money to the broker.

Unlimited loss risk

The worst case in stocks is a company bankruptcy, losing your principal. But futures are different — if prices fluctuate sharply beyond expectations (e.g., geopolitical events causing oil prices to plummet 50%), your losses can far exceed your margin.

Contract expiration risk

Futures have delivery dates. You must close or roll over your position before expiration; otherwise, you will be forcibly settled. If the market is unfavorable at that time, you may be forced to settle at a loss.

Time pressure

Compared to stocks, which can be held indefinitely, futures have time limits that can pressure you. Especially during short-term volatility, you might be forced to close positions at an inopportune time.

CFD (Contract for Difference): An Upgraded Version of Futures

If futures rules are too strict, consider CFD (Contract for Difference). It combines the advantages of futures and spot trading, especially suitable for retail traders.

Main differences between CFD and futures:

• No delivery date: can hold indefinitely, no need to roll over
• More flexible leverage: choose from 1x to 200x
• Flexible contract sizes: can trade as small as 0.01 lots, while futures are usually in whole lots
• More asset varieties: stocks, forex, cryptocurrencies, commodities
• Lower entry barrier: more lenient margin requirements

But note: The risk of CFDs is the same as futures — leverage amplifies losses, so strict risk management is essential.

How to Trade Futures for Consistent Profits

1. Control leverage: beginners should use 2-5x, no more than 10x
2. Set stop-loss and take-profit: predefine before each trade, don’t change impulsively
3. Trade only liquid contracts: small bid-ask spreads, quick execution
4. Avoid overconcentration: total account exposure no more than 20%
5. Continuous learning: understand technical analysis, fundamentals, risk management
6. Start with mini contracts: reduce individual trade risk, gain experience

Summary: The Core Logic of How to Trade Futures

Futures are fundamentally a double-edged sword. They offer retail traders the chance to participate in big markets with small money, but also pose the risk of market eating up your principal.

Profitable traders have clear trading rules, strict risk awareness, and firm execution.

Losing traders are often tempted by leverage, lack stop-loss discipline, or are overconfident.

The answer to how to trade futures is simple — just like driving a high-performance sports car, high performance means high risk. You need to be cautious and professional. Start with demo accounts, small funds, and discipline, then consider increasing leverage gradually. Only then can you survive longer and earn steadily in the futures market.