Futures Trading Complete Guide | From Zero to One: Mastering Contract Operations and Futures Risk Management

I. Understanding the Nature of Futures

Futures are standardized contracts where both parties agree to deliver or receive the underlying asset at a predetermined price on a specific future date. All contract details, including the underlying asset code, trading volume specifications, minimum price movement units, trading hours, expiration date, and settlement methods, are regulated by the exchange. In Taiwan, the most commonly traded futures are the Taiwan Stock Exchange Weighted Index futures, while international markets offer a variety of options such as crude oil, gold, foreign exchange, and bonds.

II. Core Characteristics of Futures Trading

Futures employ a margin trading system, allowing investors to control a contract value much larger than their initial capital with only an initial margin deposit—this is known as leverage. Futures can be traded in both long and short directions; positions opened and closed within the same day are common, making futures more flexible than stock trading. However, this flexibility hides significant futures risk—leverage amplifies both gains and losses, and incorrect market judgments can lead to margin calls or even liquidation.

III. Essential Points Before Entering the Futures Market

✓ Futures contracts have a clear expiration date, at which point positions are forcibly closed and settled
✓ Margin trading lowers the barrier to entry but makes risk management even more critical
✓ High leverage combined with frequent intraday trading is a primary source of futures risk
✓ Futures can be used to hedge spot positions and avoid losses from price fluctuations
✓ Transaction fees are relatively low compared to stocks, but trading discipline is required

To profit in the futures market, establishing a comprehensive and executable trading system is crucial, along with strict adherence to trading discipline—this is the foundation of consistent profitability.

IV. The Five Main Categories of Futures Underlying Assets

Futures trading covers six major categories:

Index — S&P 500, NASDAQ 100, Taiwan Weighted Index, etc.
Interest Rates — U.S. Treasury futures (2-year, 5-year, 10-year)
Agricultural Products — Wheat, corn, soybeans, cotton, coffee
Metals — Gold, silver, copper, platinum
Energy — Crude oil, gasoline, natural gas, heating oil

Domestic futures brokers offer a limited range of products, while international futures markets provide more liquidity and options. Margin requirements vary significantly across different underlying assets; for example, the initial margin for Taiwan’s Yuanta Futures’ major Taiwan Index futures is about TWD 306,000, while gold futures require approximately USD 2,330.

V. Nine Steps to Become a Futures Trader

Step 1: Master the basics of the futures market

Understand leverage, margin system, long and short mechanisms, and the concept of forced settlement at contract expiration.

Step 2: Confirm your trading style

Review your past investment experience to determine if futures trading suits you. Long-term investors should generally use futures as hedging tools rather than primary investment vehicles.

Step 3: Choose reputable futures brokers to open an account

Taiwanese brokers like Yuanta, KGI, Fubon, Cathay, etc., offer electronic trading systems. International brokers such as Interactive Brokers and E-trade provide a broader range of products. A good broker should offer accurate, fast quotes and low transaction fees.

Step 4: Validate your trading strategies through demo accounts

After opening an account, practice with simulated funds to test whether your trading logic can generate profits in real market conditions. Note: set stop-loss and take-profit points in advance and strictly follow them. Beginners are advised to start with mini futures.

Step 5: Select the futures contracts to trade

Choose based on market liquidity, expiration date, and your risk tolerance. Generally, contracts close to expiration are preferred, as longer-dated contracts tend to have lower liquidity.

Step 6: Deposit funds and pay margin

Calculate and transfer the required initial margin according to your broker’s requirements to support your trading plan.

Step 7: Learn to read the market and identify trading signals

Futures traders often use fundamental analysis, economic trends, and technical analysis to forecast price movements. For stock futures investors, entering when technical signals are about to trigger can make market direction easier to grasp.

Step 8: Decide on long or short positions and execute trades

Long scenario — Expect asset prices to rise, so buy first. For example, if bullish on a rebound in US stocks, buy S&P 500 E-mini futures; if prices go up, sell to realize profits.

Short scenario — Expect asset prices to fall, so sell first. For example, if anticipating a crash in oil prices, sell crude oil E-mini futures; if oil prices decline as expected, close the position for profit.

Step 9: Set stop-loss and take-profit levels

Market volatility can bring unexpected risks whether you are long or short. Plan clear stop-loss and take-profit points and execute them strictly. Beginners should use shorter stop-loss distances and smaller positions, adjusting gradually with experience.

VI. Advantages and Disadvantages of Futures

Advantages of futures

Leverage — Control larger contract values with less capital, enabling capital-efficient trading.
Flexibility in Long and Short Positions — Short selling is straightforward, without the need to borrow securities or pay borrowing fees, just hedge the corresponding contracts.
Hedging Tool — Investors can use futures to hedge against price risks of existing stock holdings.
High Liquidity — International futures markets are highly active, transparent, and offer ample liquidity, suitable for large capital investors seeking depth.

Risks and Disadvantages of futures

Leverage as a Double-Edged Sword — Amplifies both gains and losses, leading to volatile P&L. Without strict stop-loss and take-profit mechanisms, futures trading can be extremely risky.
Unlimited Liability Risk — Unlike stock investments, where the maximum loss is the invested capital, futures require only margin deposits, but the contract value is leveraged multiple times. Extreme market movements can cause investors to owe money to brokers, which is a major futures risk.
High Entry Barriers and Professional Requirements — Despite low margin requirements, futures involve high complexity, often requiring professional knowledge; most participants are institutional or professional investors.
Standardized Contract Specifications — Fixed quantities, expiration dates, and margin ratios mean less trading flexibility compared to spot markets.

VII. CFD—A Hybrid Investment Tool Combining Futures and Spot Market Advantages

Contracts for Difference (CFD) are financial derivatives where gains and losses are settled based on the price difference of the underlying asset. Unlike futures, CFDs do not involve physical delivery or expiration dates, and there is no forced settlement or rollover.

Advantages of CFDs over futures

Wide Range of Trading Instruments — While Taiwan’s futures market offers limited products, CFD platforms typically provide over 400 underlying assets, including stocks, forex, cryptocurrencies, and commodities.
High Trading Flexibility — No delivery date restrictions; can be held indefinitely. Leverage ratios are adjustable; minimum trading units can be as small as 0.01 lots, offering more flexibility than fixed futures specifications.
Lower Margin Costs — Greater leverage and much lower initial margin requirements make CFDs suitable for small retail investors.

Key Points in CFD Trading

Leverage Control — CFDs carry leverage risk but can be adjusted based on the underlying’s volatility. Low-volatility assets (like currencies) can use higher leverage; high-volatility assets (like commodities or stocks) should use lower leverage.
A Complete Trading Plan Is Essential — Develop comprehensive entry and exit strategies, including stop-loss and take-profit mechanisms, to generate consistent returns under controlled risk. Discipline in execution—buy low/sell high or sell high/buy low—is crucial.

VIII. Summary: Core Principles of Futures Risk Management

The futures market offers opportunities but also hidden dangers. To succeed, one must deeply understand futures risks—leverage amplification, unlimited losses, market volatility, time decay, and more—that can destroy unprepared traders. Therefore, establishing a complete trading system, strictly following discipline, and setting reasonable stop-loss points are more important than seeking quick profits. Whether trading futures or CFDs, continuous learning, small-scale testing, and gradual experience accumulation are the right paths toward stable profits.