## Essential Reading Before Getting Started with Futures: Understanding the Underlying Logic of Futures Trading from Zero

Many retail investors shy away at the mention of **futures**, thinking it's a tool only for professional investors. But in reality, if you understand the essence of futures and master risk management, ordinary people can definitely use it to increase investment returns or hedge risks. Today, let's take a thorough look at what futures really are and how to participate safely.

## Why Do Futures Exist? Starting with Farmers' Troubles

To understand futures, first understand the problems they solve.

Imagine a farmer who plants 100 acres of wheat in spring. When harvest time comes, he faces a big problem: **he doesn't know how much wheat will sell for in autumn**. In a bumper harvest year, prices drop, hurting farmers; in a poor harvest, prices soar. This uncertainty is a nightmare for both farmers and consumers.

Ancient Chinese methods involved government building warehouses, buying during good years, and supplying at stable prices during bad years. But the Western approach took a different route: **contract trading**. Wheat farmers could sign contracts now with grain merchants, agreeing on a price to deliver a certain amount of wheat in autumn. This way, both parties lock in the risk.

This agreement is the most primitive form of futures. And because only a deposit (margin) is required, not the full amount, farmers can arrange large future transactions with very little money — this is the origin of **leverage**.

## Modern Futures Market: From Agricultural Products to Financial Derivatives

Today, futures have long surpassed agricultural products. You can trade:

- **Index Futures**: S&P 500, NASDAQ 100, Dow Jones Industrial Average
- **Metal Futures**: Gold, Silver, Copper, Platinum
- **Energy Futures**: Crude Oil, Natural Gas, Gasoline
- **Interest Rate Futures**: Various government bonds
- **Agricultural Futures**: Wheat, Corn, Soybeans, Cotton, Coffee, Sugar
- **Currency Futures**: Various currency pairs

The most active futures trading globally occurs in the United States — especially in S&P 500 futures, which have very high trading volume and liquidity.

## What's Inside a Futures Contract?

A **futures contract** is a standardized contract regulated by the exchange, clearly stating:

✓ Underlying asset (what you're trading)
✓ Contract size (e.g., 100 ounces of gold)
✓ Minimum price movement (tick size)
✓ Trading hours (when trading is allowed)
✓ Expiry date (when to close or deliver)
✓ Settlement method (cash settlement or physical delivery)

For example, CME's crude oil futures: one standard contract represents 1,000 barrels of oil, with a minimum price fluctuation of $0.01 per barrel. Contracts have fixed expiry months, and must be closed or delivered before expiry.

## Futures vs Spot: The Fundamental Difference in Two Trading Methods

| Dimension | Futures | Spot |
|------------|---------|-------|
| **Trading Object** | Contract (future trading promise) | Physical asset (existing commodity/stock) |
| **Capital Requirement** | Margin 5-10% | Full payment 100% |
| **Trading Direction** | Long or short | Usually only long |
| **Delivery Time** | Fixed expiry date | Immediate or T+2 (trade date plus 2 days) |
| **Leverage** | High leverage (10-20x) | No or low leverage |

**Core difference**: Buying spot is truly buying the asset; futures are buying a "future trading agreement" with only a margin deposit. This gives futures the characteristic of **controlling large positions with small capital** — the ability to "bet big with little money."

## How to Trade Futures? 8 Steps from Beginner to Practical

### Step 1: Recognize Your Trading Style

Ask yourself three questions:
- Do I want to hold long-term or trade short-term swings?
- Am I confident in technical analysis?
- What's my risk tolerance?

Long-term investors usually **are not suited to use futures as their main tool**; futures are more suitable for short-term traders or as hedging tools. Beginners should start with demo accounts, not risking real money immediately.

### Step 2: Choose Trading Platforms and Futures Products

Major global futures exchanges include:
- CME (Chicago Mercantile Exchange)
- COMEX (Commodity Exchange, part of CME)
- NYMEX (New York Mercantile Exchange)
- SGX (Singapore Exchange)
- TAIFEX (Taiwan Futures Exchange)

Investors typically open accounts through futures brokers (brokers), who act as intermediaries connecting traders and exchanges. When choosing a broker, consider: **platform security, quote speed, and competitive fees**.

### Step 3: Test Strategies with a Demo Account

95% of futures platforms offer free demo accounts. Don't skip this step. Trade with virtual funds for at least 2-4 weeks to see if your trading system can actually make money. If you lose money in demo, it's unlikely you'll turn it around with real funds.

### Step 4: Study the Details of Your Target Contract

After selecting a product, understand:
- Margin requirements
- Minimum trading units
- Delivery months (when to close)
- Historical volatility (to assess risk)

For example, if trading S&P 500 futures, know approximately how much margin is needed and what one contract represents in value.

### Step 5: Deposit Funds and Set Trading Rules

After depositing margin, **the most important step**: establish stop-loss and take-profit rules.

- What's the maximum loss you can tolerate per trade?
- If loss reaches that limit, close immediately
- What's your target profit per trade? Take profits when reached

These are not suggestions but **strict rules**. Leverage amplifies mistakes, so discipline is your lifeline.

### Step 6: Decide on Long or Short Strategies

**Long (Buy)**: Expect prices to rise
- Expect oil prices to surge? Buy crude oil futures
- Bullish on US stocks? Buy S&P 500 futures
- Oil price rises, contract appreciates, sell for profit

**Short (Sell)**: Expect prices to fall
- Think gold will decline? Sell gold futures
- Expect tech stocks to correct? Sell NASDAQ 100 futures
- If prices fall as expected, close position for profit

Shorting is a major advantage of futures over stocks — **shorting stocks is complicated** (requires borrowing, paying interest), but futures can be shorted anytime, much more flexible.

### Step 7: Use Hedging to Manage Risks

Suppose you own Apple stock but worry about a market crash. You can hedge by selling S&P 500 futures:

- If the market crashes, Apple stock loses value, but short futures profit offsets the loss
- If the market rises, Apple gains, though short futures lose, overall you still profit

This technique is especially useful **before major news releases or long holidays** — locking in risks, giving peace of mind.

### Step 8: Adjust Positions Based on Market Signals

Trading futures requires paying attention to:
- **Fundamentals**: economic data, central bank policies, supply/demand
- **Technical analysis**: support/resistance, trend direction, volume
- **News**: major announcements, geopolitical events, sudden shocks

Short-term traders tend to focus on the most liquid contracts (usually near expiry), using technicals and news to judge short-term volatility. Long-term investors focus more on fundamentals.

## The Deadly Attraction and Risks of Futures

### Why do so many people trade futures?

**1. Leverage — Betting Big with Little**

Controlling a contract worth 100% of its value with only 5% margin, equivalent to 20x leverage. Profits can grow rapidly, making it addictive.

**2. Bidirectional Trading — Opportunities in Bear Markets Too**

Stocks can only go down or be sold off; you can only watch or exit early. Futures allow you to profit from both rising and falling markets.

**3. High Liquidity — Enter and Exit Anytime**

Global futures markets have many participants, small bid-ask spreads, and no liquidity worries.

**4. Hedging Tool — Protect Existing Assets**

No need to sell stocks; hedge with futures to participate in market gains or protect against downturns.

### Why is futures so dangerous?

**1. Leverage is a Double-Edged Sword**

Losses are magnified 20 times. A 5% loss can wipe out your entire capital and even result in owing money to the broker — this is **margin call**.

If you lack funds to meet margin calls, the broker has the right to **force close** your positions, often at the worst prices.

**2. Unlimited Loss Potential**

Stocks can only lose your invested capital. Futures, with only margin paid, can result in losses exceeding your initial deposit. In extreme cases, you may owe the broker a large sum.

**3. Contracts Have Expiry Dates**

Futures cannot be held indefinitely. You must close or deliver before expiry; if timing is bad, you may be forced out at the worst moment.

**4. Psychological Pressure**

Leverage amplifies account fluctuations. Watching your position fluctuate thousands of dollars per minute makes it hard to stay calm, leading to impulsive stops or over-leverage.

## CFD (Contract for Difference): A Milder Version of Futures

If futures are too aggressive, consider **CFD**. It combines advantages of futures and spot trading, especially suitable for retail investors.

### CFD vs Futures — What Are the Advantages?

**1. No Expiry Date**

Futures must be closed by a fixed date; CFDs can theoretically be held indefinitely (minus fees). No need to roll over or transfer contracts.

**2. Broader Range of Assets**

Futures are limited by exchange rules; CFD platforms often offer 200+ assets — stocks, forex, cryptocurrencies, commodities — whatever you want to trade.

**3. Flexible Contract Sizes**

Futures have fixed sizes (one contract). CFDs let you choose — trade as little as 0.01 lot (micro), or 30 lots, with leverage from 1x to 200x. Lower entry barriers.

**4. Lower Margin Requirements**

Futures have strict margin rules. CFDs, with adjustable leverage, can require very little capital to enter.

### CFD Risks Are Also Not Low

Although more flexible, CFD risks are similar:

- **Leverage risk**: higher leverage means faster losses
- **Margin calls**: if your account loses a certain amount, you need to top up
- **Price volatility**: high-volatility assets (like crypto) can wipe out your position instantly
- **Platform risk**: choose reputable, licensed platforms to avoid scams

## How to Participate in Futures Safely?

### 5 Essential Points

**1. Strict Stop-Loss and Take-Profit**

Set target loss and profit levels before each trade. Close when reached. Don’t gamble on turning losses around or be greedy.

**2. Control Position Size**

Don’t risk all your funds on one trade. Usually risk no more than 2-3% of your account per trade — so even after 5-10 consecutive losses, your account remains alive.

**3. Choose Liquid Contracts**

Trade high-volume contracts (like S&P 500 futures) with small spreads for quick entry/exit. Small markets are prone to being trapped or illiquid.

**4. Practice with Demo Accounts**

Don’t treat demo trading lightly. Use it as a test, until you can consistently profit before risking real money.

**5. Regular Review and Adjustment**

Review your trades monthly: which made money, why? which lost, why? Find patterns, optimize your strategy continuously.

## Final Words

Futures are essentially a **double-edged sword**. They offer the chance to leverage small capital for big gains but also carry the risk of rapid bankruptcy.

The key difference lies in **your discipline**:

- Do you have a complete trading plan?
- Can you stick to stop-losses when losing?
- Can you take profits decisively?
- Can you follow your rules consistently over the long term?

If you can answer yes to these five questions, futures are not a monster but an efficient tool to amplify gains. If not, start with spot and long-term investing, and only try futures once your mindset and knowledge are more mature.

There are no shortcuts in investing — only respect for risk can help you go further.