What is futures? The Complete Guide to Futures Trading for Beginners

From “Living Day-to-Day” to “Locking in the Future”: The Origin of Futures

What are futures? This goes back to humanity’s oldest form of risk. Since the birth of agricultural civilization, farmers have faced a dilemma—droughts, floods, locusts can ruin an entire year’s harvest. During bumper crops, grains are cheap as dirt; during poor harvests, prices soar to sky-high levels. These unpredictable price fluctuations have destroyed countless families.

Western merchants came up with a solution: sign contracts in advance, agreeing to buy or sell agricultural products at a fixed price at a future date. This allows farmers to lock in prices early, and merchants to hedge against price risks. This is the earliest concept of futures.

Later, this logic evolved into modern financial instruments, allowing trading not only of agricultural products but also of stock indices, crude oil, metals, exchange rates, bonds, and all other assets that can be priced.

Core Features of Futures: Control 100% of Assets with 10% of the Money

What is the essence of futures? It is a standardized contract specifying the underlying asset, quantity, price, delivery date, and settlement method. But what truly attracts traders is—you only need to pay a margin (usually 5%-10% of the contract value) to control the entire contract’s worth.

For example, a S&P 500 index futures contract might be worth $100,000, but you only need to deposit $10,000–$20,000 as margin to trade it. This is the power of leverage—using a small amount of money to control large assets.

However, this double-edged sword also means: profits are amplified, and losses are amplified too. A wrong directional judgment could not only wipe out your margin but also leave you owing money to the broker.

What’s in a Futures Contract?

Exchanges clearly specify the details of each futures contract:

• Commodity code and name — e.g., ES for S&P 500 mini futures
• Contract specifications — how much underlying asset each contract represents (e.g., 100 ounces of gold)
• Minimum price fluctuation — smallest price move (e.g., $0.25 per ounce)
• Trading hours — different assets have different trading sessions
• Expiration date — the date the contract expires; you must close or deliver
• Settlement method — physical delivery or cash settlement

How to Trade Futures: Going Long and Going Short

Long strategy (bullish): If you expect oil prices to rise, buy crude oil futures contracts. When oil prices go up, the contract appreciates, and you profit by selling it. Similarly, if you believe the US stock market will rebound, buy S&P 500 futures.

Short strategy (bearish): If you think an asset’s price will fall, sell the contract directly. When the price drops, buy it back to close the position and pocket the difference. This is the biggest advantage of futures over stocks—shorting stocks is complicated, requiring borrowing and paying fees; futures shorting is just as simple as going long.

Hedging strategy (risk hedging): You hold Apple stocks but worry about a market crash. You can simultaneously sell S&P 500 futures short. If the market indeed falls, the gains from futures can offset the stock losses. This is a common insurance strategy used by institutional investors.

Futures VS Spot: Three Core Differences

A simple analogy: buying spot is like buying a house on the spot—pay full price; buying futures is like paying a deposit to lock in the price, with the actual transfer happening at delivery.

8 Steps to Start Trading Futures

Step 1: Learn the Basics
Understand that futures have expiration dates, require margin, feature leverage, and can be shorted. This is not optional; it’s essential.

Step 2: Assess Your Trading Style
Ask yourself: Are you a long-term investor or a short-term trader? Futures are more suitable for short-term swing trading; long-term investors might prefer using futures for hedging.

Step 3: Choose a Reputable Futures Broker
Open an account with a well-established international futures broker. Good brokers feature: multiple product options, accurate and fast quotes, low commissions, strict risk controls.

Step 4: Practice with a Demo Account
Most platforms offer free demo accounts. Use virtual funds to repeatedly test your strategies until you can profit consistently before risking real money.

Step 5: Select Trading Instruments
Popular futures include:

• Index futures (S&P 500, NASDAQ 100, Dow Jones)
• Energy futures (crude oil, natural gas)
• Metal futures (gold, silver, copper)
• Agricultural futures (wheat, corn, soybeans)
• Interest rate futures (US Treasuries)

Step 6: Deposit Funds and Set Risk Controls
Fund your broker account, but the key is—set stop-loss and take-profit points before opening positions. Stick to your discipline; don’t move stops just because “I think it will go higher,” as that leads to losses.

Step 7: Develop a Trading Strategy
Short-term traders focus on technical analysis and news, choosing the most liquid near-month contracts. If trading stock futures, analyze company fundamentals, but wait for technical signals before entering.

Step 8: Execute Trades
Maintain psychological readiness—control emotions, trade strictly according to your plan. Psychology often outweighs technical analysis in determining success.

The Risks of Futures: The Dark Side You Must Know

Unlimited Loss Risk
Buying stocks can at most lose your principal, but futures are different. Since only margin is paid, in extreme market moves, losses can far exceed your margin, and you may owe money to the broker. That’s why stop-loss strategies are critical in futures trading.

Margin Calls
When your losses reach a certain level, the broker will require you to add more margin (margin call). If you fail to do so within the deadline, the broker can forcibly close your position at the worst possible price.

Leverage Traps
Leverage is a double-edged sword. It can make profits exciting, but a single wrong judgment can wipe out your account overnight. Many beginners fall here—trading high-volatility assets with 50x leverage, a 5% move can lead to liquidation.

Liquidity Risk
Some futures contracts have low trading volume and wide bid-ask spreads. When you want to close quickly, you might be forced to accept poor prices. Choose liquid, main contracts.

Time Cost
Futures have expiration dates. If your contract is about to expire and your position is still open, you must close or roll over to the next contract. Rollover can face unfavorable prices.

Advantages of Futures: Why Some Make Fortunes with Them

✓ High Capital Efficiency — With the same 10,000 yuan, futures can control much more assets than stocks
✓ Both Long and Short — Profit from rising and falling markets
✓ Hedging Tool — Protect existing positions from risks
✓ Flexible Trading — Strong liquidity, diverse products, 24-hour trading in international markets
✓ Low Costs — Compared to stocks’ spreads and commissions, futures trading costs are more transparent

Advanced Tool: Contracts for Difference(CFD)—A Hybrid of Futures and Spot

If futures still seem too complex, consider CFDs(CFD). What is a CFD? Simply put, it’s a contract between buyer and seller based on the spot price, settling only the price difference, without physical delivery.

Advantages of CFDs:

• Rich variety — Unlike futures, not limited by exchange restrictions, covering stocks, forex, cryptocurrencies, commodities, and over 200 assets
• Flexible contracts — No fixed expiration date, can hold indefinitely; leverage adjustable from 1x to 200x; trading volume from 0.01 lots
• Lower entry barrier — More flexible leverage than futures
• Easy operation — Same long/short convenience as futures, without delivery issues

Core principles of CFD trading:

1. Choose leverage based on underlying volatility — High leverage for less volatile assets like forex; lower leverage for stocks or commodities with higher volatility
2. Make a trading plan — Set comprehensive stop-loss and take-profit levels, and stick to them
3. Prioritize risk control — CFDs have no expiration date, but other risks are similar to futures; always manage risk carefully

Summary: What Is Futures, Do You Understand Now?

What is the essence of futures? It’s a bet on future prices, the most flexible trading tool in financial markets, and one of the highest-risk investment products.

For those aiming to get rich through futures, there are no shortcuts:

1. Master the basics thoroughly before placing orders
2. Use demo accounts repeatedly to validate strategies until consistently profitable
3. Establish strict risk management rules (stop-loss, take-profit, leverage limits)
4. Build psychological resilience—control greed and fear, trade rationally
5. Continuously review and optimize, accumulating trading experience

Futures are not a tool for overnight riches but a battlefield for professional investors. If you lack sufficient knowledge and mental strength, it’s better to accumulate wealth long-term through low-risk products like index funds. But if you are well-prepared, futures can indeed become the most effective tool for wealth growth.