Complete Guide to Futures Trading: Mastering the Essence of Leverage Trading from 0 to 1

What Exactly Are Futures?

Futures are essentially contracts where both parties agree to buy or sell an asset at a predetermined price at a future date. The contract specifies the underlying asset (which could be stock indices, commodities, foreign exchange, bonds, etc.), trading quantity, minimum price fluctuation, trading hours, and expiration date.

In simple terms: futures trading is like two people placing orders on an exchange—one buys, one sells—and the system matches and executes the trade. The difference is that futures contracts have a clear expiration date, after which they are forcibly closed and settled.

The Biggest Difference Between Futures and Spot Trading

Leverage — This is the core attraction and risk of futures. Traders only need to pay a margin (a small part of the initial capital) to control a contract value far exceeding that margin. For example: if the initial margin for TAIEX futures is NT$75,000, you can control a contract worth about NT$3 million.

Two-way Trading — Futures can be long (buy if bullish) or short (sell if bearish). Unlike stock investments, which require special approval to short, futures trading has far fewer restrictions.

Settlement Mechanism — Contracts must be settled at expiration. Some are cash-settled, others involve physical delivery, but for retail traders, most are cash-settled.

Core Risks You Must Understand Before Trading Futures

Leverage is a double-edged sword

Leverage amplifies gains but also magnifies losses. For example, with 10x leverage, a 10% increase in asset price yields a 100% profit, but a 10% decrease results in total loss. Even more dangerously, in extreme market volatility, losses can exceed the margin, leading to owing money to the broker.

Unlimited risk exposure

Buying stocks at most can only lose your principal. But with futures, since only margin is required and the contract value is leveraged, losses can be unlimited. That’s why strict stop-loss enforcement is a matter of life and death for futures traders.

Contract expiration forces settlement

Unlike spot assets that can be held indefinitely, futures contracts will automatically settle at expiration. If you forget or fail to close your position in time, it will be automatically settled, potentially resulting in losses or forced liquidation at unfavorable prices.

The trap of high-frequency trading

Futures trading has low transaction costs and flexible entry and exit, which can tempt traders to trade frequently. However, more trades mean more slippage and transaction costs, often eating up all profits in the end.

The Correct Process for Trading Futures

Step 1: Understand the underlying assets

Futures are available for six main categories: Index Futures (S&P 500, NASDAQ 100, etc.), Interest Rate Futures (various government bonds), Grain Futures (wheat, corn, soybeans), Metal Futures (gold, silver, copper), Energy Futures (crude oil, natural gas, gasoline), Soft Commodities (cotton, coffee, sugar).

In Taiwan, TAIEX futures are the most traded, but the international futures market offers many more options.

Step 2: Assess your trading style

Are you a long-term investor or a short-term swing trader? This determines your positioning—whether futures are mainly for hedging or as a primary investment tool. Long-term investors are less suited for futures as a main tool due to frequent rollover requirements; short-term traders can fully leverage futures’ flexibility.

Step 3: Choose a futures broker to open an account

Futures are issued by major exchanges (Taiwan Futures Exchange, CME, NYMEX, etc.). Retail traders usually open futures accounts through brokers, who provide electronic trading platforms connected to the exchanges.

When selecting a broker, consider three indicators: Variety of tradable products, Quote accuracy and speed, Competitive commission rates.

Step 4: Verify your strategy with a demo account

After opening an account, practice with simulated funds to test whether your trading strategy can generate profits in the market. This step is crucial—don’t rush to trade with real money.

Step 5: Determine the margin requirement

Different futures products have different margin requirements. For example, large TAIEX futures might require NT$300,000 initial margin, while smaller contracts may need NT$75,000. Before entering the real market, clarify the margin needed for your chosen asset.

Step 6: Deposit funds and select the contract

Once prepared, deposit the required funds and decide which specific contract to trade. Note: futures traders usually prefer highly liquid contracts (near expiration) because longer-dated contracts have lower trading volume and wider spreads.

Step 7: Learn to identify trading signals

Use technical analysis, fundamental analysis, or economic data to judge market direction. Futures trading is similar to stocks, but due to expiration dates, it’s advisable to enter when technical signals are about to trigger, making it easier to grasp market trends.

Step 8: Decide whether to go long or short

Long scenario: Expect asset prices to rise. For example, if bullish on the US stock rebound, buy S&P 500 futures; if expecting oil prices to rise, buy crude oil futures.

Short scenario: Expect asset prices to fall. If anticipating a stock market decline, sell S&P 500 futures; if expecting a sharp drop in oil, sell crude oil futures.

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

This is the most critical step in futures trading. Always plan in advance: how much loss you’re willing to accept (stop-loss), and at what profit level you’ll take profits (take-profit). Beginners should set tighter stop-losses and smaller positions, then gradually adjust with experience.

Advantages of Futures Trading

Leverage for big gains — Leverage allows high capital efficiency, controlling larger positions with less capital.

Flexible shorting — Unlike stocks, which require borrowing and paying interest, futures can be shorted simply by selling contracts.

Hedging risk — If holding physical assets but worried about short-term declines, you can short futures to hedge.

High liquidity — International futures markets are highly traded and transparent, making them excellent tools for large capital allocation.

Hidden Risks and Limitations of Futures

Leverage risk — Both gains and losses are magnified; traders without strict stop-loss discipline often face ruin.

Unlimited potential losses — Contract values can exceed margin multiples, leading to unlimited losses.

High entry barrier — While margin requirements are low, futures trading demands higher professional knowledge than stock investing.

Standardized contracts — Futures are standardized, with fixed volume, expiration, and ratios. Although mini contracts exist, flexibility is limited.

Frequent rollover costs — Continuously rolling over contracts from one expiry to another incurs costs.

CFD: An Intermediate Choice Between Futures and Spot

Contracts for Difference (CFD) are a newer derivative product combining leverage similar to futures with the flexibility of spot trading. They are agreements between buyer and seller based on the current spot price, settled via price difference, without physical delivery.

Advantages of CFDs over futures

No delivery date — Can hold positions indefinitely, avoiding forced settlement and rollover costs.

Wide variety of assets — Unlike futures constrained by exchange listings, CFDs can trade stocks, forex, cryptocurrencies, commodities, and more.

Flexible specifications — Trade in any lot size, with adjustable leverage. Beginners can start with minimal units.

Lower entry costs — For the same underlying, initial margin for CFDs is usually lower than futures.

Key points in CFD trading

Leverage control is paramount — Different assets have different volatility. Use higher leverage for less volatile currencies, lower leverage for volatile stocks or commodities.

Develop a complete trading plan — Predefine entry conditions, stop-loss, and take-profit levels. Never trade impulsively. Even simple buy low/sell high logic requires planning; without it, you’ll lose money.

Keys to Successful Futures Trading

Regardless of trading futures or other derivatives, success hinges on:

1. Building a complete trading system — Not relying on intuition or luck, but having clear entry signals, stop-loss, and take-profit points.

2. Strict discipline — Even if you’re bullish, close the position immediately if stop-loss is triggered. Without discipline, even the best system is useless.

3. Prioritize risk control — Focus on survival first, then profit. Keep each trade’s loss within manageable limits.

4. Continuous market learning — Markets change rapidly; keep learning new analysis methods and market knowledge, but beware of overtrading traps.

Futures are not gambling—they require professional knowledge, strict discipline, and a calm mindset. Only by respecting the market and risks can you survive and profit long-term in the futures market.