Futures Trading from Beginner to Expert | Master the Core Elements of Futures Trading in One Article

What Are Index Futures? Why Understand Futures Trading Strategies

Futures are standardized contracts signed by buyers and sellers based on expectations of future prices, traded centrally on exchanges. Investors only need to pay a margin to participate, which features leverage, making futures trading strategies a popular choice among many investors.

The underlying assets of futures are diverse, covering commodities, raw materials, foreign exchange, stocks, bonds, and indices. Buyers and sellers post prices on the exchange, with one buying and the other selling, and counterparties matching orders. Unlike stocks, futures contracts have a clear expiration date, at which point they are automatically closed out and settled.

In Taiwan, the most popular is the Taiwan Stock Index Futures, which is based on the Taiwan Weighted Index.

Five Core Elements You Must Know Before Trading Index Futures

What Does a Futures Contract Include?

Each futures contract is explicitly defined by the exchange, typically including: product code, trading volume (contract specifications), minimum price fluctuation, trading hours, expiration date, and delivery method (physical or cash settlement). Investors can view detailed contract specifications on the futures broker’s website.

For example, Taiwan index futures require a margin of about NT$300,000 for large contracts and NT$75,000 for mini contracts. Other popular products include Nasdaq 100 futures with a margin of about NT$98,000, Brent crude oil futures at about NT$54,000, and gold futures at around US$2,330.

Five Key Features of Index Futures Trading Strategies

First, futures are contracts that specify future delivery dates and trading prices; second, they use a margin trading system with high leverage; third, they support same-day buy and sell, allowing flexible long and short positions; fourth, price movements can help investors forecast the spot market direction; fifth, they can be used to hedge against underlying asset price volatility.

Index Futures Trading vs. Stock Investment: Why Choose Futures

Compared to stocks, futures trading offers clear advantages. Transaction fees are low, both long and short positions are supported, and intraday trading can be done without needing day trading qualifications. These features make futures trading more flexible. However, this flexibility also means that many investors gradually realize the risks involved as they gain experience.

Three Core Stages to Start Trading Index Futures

Stage One: Learning and Preparation

Build Market Awareness: Understand concepts like futures expiration dates, margin systems, and leverage features, as well as mechanisms for long and short trading.

Determine Trading Direction: Assess your investment style—whether you prefer long-term investing or short-term trading. Long-term investors often use futures for hedging rather than as primary investments; short-term traders may frequently use futures strategies for spread trading.

Choose a Futures Broker: Major global futures exchanges include Taiwan Futures Exchange, CME (Chicago Mercantile Exchange), NYMEX (New York Mercantile Exchange), and SGX (Singapore Exchange). Investors typically need to open a futures account with a broker, which connects to exchanges and clearinghouses, providing electronic order systems. Local brokers like Yuanta Futures, KGI Futures, and Capital Futures offer domestic trading; for international futures, consider international futures brokers.

A good futures broker should offer a wide range of trading products, accurate and fast quotes, and low commissions.

Stage Two: Practice and Validation

Practice with a Demo Account: After opening an account, it’s recommended to use virtual funds to simulate trading, testing whether your strategies can generate profits in the market. This stage is crucial for building confidence and identifying strategy flaws.

Develop a Trading Plan: Before real trading, establish a comprehensive, executable trading system. This includes defining entry signals, exit mechanisms, stop-loss levels, and profit targets. Beginners should start with mini futures to control position sizes until they gain sufficient experience.

Learn Market Analysis Skills: Success in futures trading depends on identifying reliable trading signals. Traders tend to focus on liquid contracts close to expiration. Signal sources include fundamental analysis, economic data releases, or technical analysis. For stock futures, analysis methods are similar to stock research, but since contracts have expiration dates, it’s advisable to enter positions before technical signals activate, as market direction becomes clearer then.

Stage Three: Actual Trading and Risk Management

Long Strategy: When expecting asset prices to rise, buy futures contracts. For example, if bullish on a rebound in US stocks, buy S&P 500 futures or Dow Jones futures; if prices move as expected, sell the contracts for profit.

Short Strategy: When expecting prices to fall, sell futures contracts first. When prices decline, close the position for profit. For example, if anticipating a crash in oil prices, sell oil futures.

Strictly Implement Stop-Loss and Take-Profit: Regardless of long or short positions, market volatility poses risks. Planning stop-loss and take-profit points is essential. Beginners should set shorter stop-loss levels and smaller positions. As experience grows, adjust based on market conditions. It’s important to emphasize that leverage amplifies both gains and losses, so disciplined execution is critical.

Advantages and Disadvantages of Index Futures Trading Strategies

Main Advantages of Futures Trading

Leverage and High Capital Efficiency: Futures offer leverage, allowing investors to control larger contract values with less capital, achieving a “small capital, big position” effect.

Ease of Long and Short Operations: Unlike stocks, which mainly involve buying and hoping for appreciation, short selling stocks requires borrowing and paying fees. Futures allow easy long and short positions, suitable for market volatility.

Hedging Tool: Some investors prefer not to sell stocks early but can use futures to short and hedge against market fluctuations.

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

Main Risks of Index Futures Trading Strategies

Leverage Risk: Leverage is a double-edged sword; it amplifies both profits and losses. Without strict stop-loss and take-profit controls, futures trading can be very risky.

Unlimited Liability Risk: Buying stocks limits losses to the invested capital, but futures require only margin, which is leveraged. This means investors bear higher risks, and in extreme cases, may owe money to brokers.

Higher Entry Barriers: Although margin trading requires less initial capital, futures demand much higher professional knowledge, often involving institutional or professional investors.

Standardized Contracts: Futures are standardized, with fixed quantities, expiration dates, and margin ratios, lacking flexibility.

Alternative to Futures Trading Strategies: Contracts for Difference (CFD)

CFD (Contract For Difference) combines advantages of futures and spot trading, and is most common in forex trading. Compared to futures, CFDs are more suitable for retail investors.

Core Features of CFDs

Wide Range of Trading Instruments: Taiwan has limited futures products, but CFDs cover stocks, forex, cryptocurrencies, and more markets.

Flexible Trading: CFDs generally have no delivery deadlines and can be held indefinitely without rollover concerns. They are more flexible, with adjustable leverage, and minimum trade sizes from 0.01 lots to dozens of lots.

Lower Entry Costs: Lower margin requirements, adjustable leverage ratios, and more accessible initial investments compared to futures.

Key Points for CFD Trading

Leverage Control: Different assets have different leverage options. Lower volatility currencies can use higher leverage; high-volatility assets like stocks or commodities should use lower leverage.

Complete Trading Plan: Establish stop-loss and take-profit mechanisms within a risk-controlled framework to generate consistent returns.

Keys to Success in Futures Trading Strategies

Whether using futures or CFDs for index trading, success hinges on establishing a comprehensive, executable trading system and strictly adhering to discipline. Rules and an effective trading system are the foundation of profitability.

Investors should thoroughly learn, use demo accounts to understand risks, develop clear entry and exit strategies, and operate within manageable risk levels.