Futures Trading Beginner's Guide: Understanding How to Trade Futures from Scratch

Want to make quick money? Many people hear that futures can leverage small amounts into big gains and think about getting rich overnight. But the reality is, futures can both bring quick profits and cause instant margin calls. How do you play futures without losing everything? This article will break down the truth about futures.

What exactly are futures? Explained in one simple sentence

Futures are essentially a contract to buy or sell something in the future. You agree now that, in three months, I will sell you 100 jin of rice at 100 yuan, and that’s a futures contract.

But the way futures are played is much more complex. They can be used to trade not only agricultural products but also oil, gold, stock indices, and even exchange rates and interest rates. The hottest markets globally are U.S. stock index futures, such as the S&P 500 and Nasdaq 100.

What exactly is written in a futures contract?

Each futures contract is like a legal document that specifies:

• What is being traded (e.g., crude oil, gold, or stock index)
• The quantity per trade
• The minimum price fluctuation
• When settlement and delivery are due
• Whether physical delivery or cash settlement

These details are predetermined by the exchange, leaving no room for negotiation by investors.

Why are futures so risky? Unveiling the true nature of leverage

The most attractive feature of futures is leverage. You only need to put up 5-10% of the contract value as margin to control the entire position. Sounds exciting? Don’t get too ahead of yourself.

For example: Suppose the S&P 500 futures are at 5000 points, with each contract worth 50,000 yuan. You only need to deposit 5,000 yuan as margin to go long. If the S&P 500 rises to 5100 points, your 50,000 yuan contract increases in value to 51,000 yuan, earning 1,000 yuan—using 5,000 yuan of margin to make a 1,000 yuan profit, a 20% return.

But conversely, if the index drops to 4900 points, your contract’s value falls to 49,000 yuan, losing 1,000 yuan. At this point, your margin of 5,000 yuan is reduced to 4,000 yuan, and you may be forcibly liquidated. The key point is, losses can exceed your margin. If the price swings are too violent, you could even owe money to your broker. That’s why beginners are often easily “cut” when entering the futures market.

How to play futures? 8 steps from beginner to practical

Step 1: Have a basic understanding of the futures market

The three main features of futures are: they have an expiration date, you can go long or short, and trading only requires margin. Understanding these three points clarifies the fundamental difference between futures and stocks.

Step 2: Decide if you are suited for long-term or short-term trading

This is crucial. If you prefer holding a stock long-term, futures may not be your main tool because contracts have expiration dates and require frequent adjustments. But if you are a short-term trader or want to hedge stock risks, futures are especially useful.

Step 3: Choose a reliable futures broker to open an account

Futures exchanges (like CME, NYMEX, etc.) are the issuers of futures. Retail investors need to open an account with a futures broker. A good broker should offer: fast and accurate quotes, low commissions, a wide range of trading products, and a stable, secure system.

Step 4: Practice with a demo account first

Don’t jump in with real money right away. Most trading platforms offer demo accounts, allowing you to test your strategies with virtual funds. Skipping this step can be costly because the leverage in futures amplifies all decisions, including mistakes.

Step 5: Choose the futures products to trade

Futures are divided into six main categories: index (S&P 500, Nasdaq 100), currency, interest rate (government bond futures), metals (gold, silver, copper), energy (crude oil, natural gas), and agricultural products (wheat, corn, soybeans).

Beginners are advised to start with the most liquid products, like the S&P 500 or crude oil, because they have tight bid-ask spreads and are easier to close positions quickly.

Step 6: Deposit funds and understand margin requirements

Different futures contracts require different margins. For example, trading the stock index futures of the Hong Kong market and the U.S. Dow Jones futures require vastly different margins. Before opening an account, carefully review the contract specifications and calculate how much capital you need to get started.

Step 7: Develop your trading strategy

This is the most important step in the entire process. A strategy is not just “buy low, sell high” but involves answering questions like:

• When should I enter a position?
• When must I cut losses? Where is the stop-loss point?
• When to take profit and close the position? Where is the take-profit point?
• What is the maximum loss I can tolerate on a single trade?

Once these rules are set, they must be strictly followed. Do not change your plan just because of price fluctuations.

Step 8: Execute trades—buy low, sell high or sell high, buy low

This is the final step and also the easiest to make mistakes.

Going long or short? How to play the two types of futures

Going long means betting on rising prices. For example, if you expect the Federal Reserve to inject liquidity and the U.S. stock market to rebound, you can buy S&P 500 futures or Dow futures. If the market indeed surges, your contract gains value, and you profit when you sell.

Similarly, if you are bullish on oil prices, you can buy crude oil futures. When oil prices rise, your contract appreciates, and you profit from the difference when closing.

Going short means betting on falling prices. For example, if you believe the central bank will tighten liquidity and the U.S. stock market will fall, you can sell S&P 500 futures directly. If the market drops, your contract gains value (since you are the seller), and you profit when you close the position.

Shorting futures is especially useful for retail traders. Short selling stocks is complicated, involving borrowing shares and paying borrow fees, but in futures, going short is just as simple as going long—just a sell order.

The pros and cons of futures: why some make money and others lose

Advantages of futures:

Leverage allows high capital efficiency. With 50,000 yuan margin, you can control a 500,000 yuan contract, effectively multiplying your buying power tenfold. This is very attractive for investors with sufficient capital seeking high returns.

Both long and short positions are easy to execute, and risk hedging is powerful. For example, an Apple stockholder worried about a market downturn can sell S&P 500 futures. Even if Apple’s stock falls, the gains from futures can offset some losses.

The international futures market features frequent trading, many participants, high liquidity, and minimal bid-ask spreads. This means you can enter and exit positions whenever you want without worrying about no buyers or sellers.

Risks and weaknesses of futures:

Leverage is a double-edged sword. It amplifies gains but also magnifies losses. Without strict stop-loss discipline, a single wrong judgment can wipe out your account.

Futures involve unlimited liability. Buying stocks at most risks losing your invested capital, but futures require only a margin deposit, which can be 20 times the contract value. If the market moves against you, you may not only lose your margin but also owe money to your broker.

Although the entry barrier seems low (small margin), the actual requirements are high. Futures demand high professionalism and mental resilience. Most participants are institutional investors or experienced traders. Retail traders should think carefully before entering.

Contract specifications are fixed and lack flexibility. The trading volume, expiration dates, and margin ratios are all predetermined by the exchange. While micro and mini contracts exist, overall, there’s little room for negotiation.

CFD (Contract for Difference): an upgraded version of futures, more suitable for retail traders

If futures are too intense to handle, consider CFD (Contract for Difference). It combines the advantages of futures and spot trading and has become especially popular among retail traders in recent years.

CFD is an agreement between two parties to track the spot price, with profits or losses settled by the difference. The entire process involves no physical delivery and has no expiration date. This means you are not forced to settle at a specific time and can hold positions as long as you want.

Compared to futures, CFDs have several clear advantages:

More trading instruments. In China, futures are limited, but CFDs cover over 200 financial assets, including stocks, forex, cryptocurrencies, and bonds—anything you want to trade.

More flexible specifications. The minimum CFD trading volume can be from 0.01 lots to dozens of lots, with leverage adjustable from 1x to 200x. Futures contracts are fixed in size and less flexible.

Lower costs. CFD margin requirements are less strict than futures, making entry more affordable. The flexible leverage allows you to adjust according to your risk tolerance.

How to operate CFDs?

First, control leverage carefully. Different assets require different leverage strategies. Forex has small fluctuations, so high leverage is feasible, but stocks and commodities are more volatile, requiring lower leverage to avoid liquidation.

Second, develop a comprehensive trading plan. Basic logic like buy low, sell high or sell high, buy low is just the start. A real trading plan should include stop-loss levels, take-profit targets, and maximum loss per trade. Set these rules before trading and stick to them to avoid chaos during market swings.

Final words: how to play futures without losing money

In the futures market, profitable traders are often not those who bet the most or have the biggest guts, but those who follow strict discipline and maintain a stable mindset.

The core secret to playing futures is four words: Stop-loss must be strict. Once you set a stop-loss point, you must execute it, even if you are reluctant. Because leverage can magnify a small mistake into a catastrophic loss.

Start with demo accounts, trade small amounts, and choose the most liquid products. These three “start from…” steps can help you survive longer. The longer you survive, the more likely you are to make money.