Complete Guide to Futures Investment | From Risk Awareness to Mastering Trading Skills

I. Recognize the Nature and Risks of Futures

Futures are contractual commitments where both parties agree to transact at a specified future date and price on an exchange. This contract covers various financial products such as commodities, raw materials, foreign exchange, stocks, bonds, and indices.

Most importantly, understand two key features: margin trading and leverage effect. Futures require only a portion of the contract value as margin to control a much larger position, which is leverage. Leverage is a double-edged sword—it can amplify profits but also magnify losses infinitely. Unlike buying stocks where the maximum loss is the invested capital, futures investors bear unlimited liability and, in extreme volatility, may even owe money to the broker.

II. What Are the Underlying Assets of Futures?

According to exchange classifications, futures are mainly divided into six categories:

Index Futures track stock index movements, such as the Taiwan Weighted Index, S&P 500, NASDAQ 100, and are the most commonly traded by retail investors.

Interest Rate Futures primarily involve government bonds with different maturities like 2-year, 5-year, and 10-year.

Grain Futures include wheat, corn, soybeans, and other agricultural products, with volatility influenced by weather and supply-demand factors.

Metal Futures include gold, silver, copper, platinum, and other precious metals, often seen as hedging tools.

Energy Futures cover crude oil, gasoline, natural gas, etc., closely related to global economic conditions.

Soft Commodities such as cotton, cocoa, coffee, sugar, which are more affected by seasonal and political factors.

III. Essential Elements of Futures Contracts

Each futures contract clearly specifies:

• Product code and name for unique identification
• Contract size indicating the standard quantity per contract
• Minimum price fluctuation representing the smallest price movement
• Trading hours determined by the underlying asset
• Expiration date for mandatory settlement
• Settlement method whether physical delivery or cash settlement

In Taiwan, the most popular is the Taiwan Futures Exchange (TAIFEX) index futures (tracking the Taiwan Weighted Index), but the variety of trading products is limited. International futures markets offer a broader selection.

IV. Core Differences Between Futures and Stock Investment

Many beginners are attracted to futures because they offer clear advantages over stock trading:

Lower transaction costs—futures commissions are much lower than stocks.

Flexibility to go long or short—no need for special short-selling qualifications or borrowing stocks, making it simple and convenient.

Immediate exit—can buy and sell on the same day, providing high liquidity.

Small capital participation—only margin is needed to participate, reducing entry costs.

However, these advantages come with trade-offs: high risk, high-frequency trading can be addictive, and leverage traps are hard to escape. Many newcomers are lured by these “advantages” but end up quitting due to lack of a complete trading system and strict risk management.

V. Nine Key Steps to Enter the Futures Market

Step 1: Build a Basic Understanding of the Futures Market

Futures contracts have a clear expiration date, after which settlement is mandatory. Trading only requires margin, with leverage features allowing both long and short positions. These characteristics make futures fast-paced, high-risk, and full of opportunities.

Step 2: Determine Your Trading Style

Reflect on your past investment experience—are you more inclined toward long-term holding or short-term trading? If you prefer long-term investing, futures may not be your main tool but rather a risk hedging instrument. Long-term investors can use short futures to offset spot position risks; when stocks fall, profits from short futures can compensate for losses.

Step 3: Choose a Suitable Futures Broker

Futures contracts are issued by various exchanges such as Taiwan Futures Exchange (TAIFEX), CME (Chicago Mercantile Exchange), NYSE, etc. Investors generally need to open an account with a broker’s futures department to access electronic trading systems.

Choose a broker based on three criteria: diverse product offerings, accurate and fast quotes, low commissions.

In Taiwan, product options are limited; for international futures (like US stock index futures, crude oil, precious metals), it’s recommended to select brokers offering international futures trading.

Step 4: Verify Trading Strategies with a Demo Account

After opening an account, practice with simulated funds. Through demo trading, you can:

• Familiarize yourself with the trading platform
• Test whether your strategies are profitable
• Experience the real risks of leverage trading
• Accumulate experience without real losses

This step is essential before entering the real market.

Step 5: Select Trading Underlying and Contracts

After sufficient practice, decide on specific futures contracts to trade. Margin requirements vary greatly among products. For example:

For initial participation, start with smaller contracts to reduce risk exposure.

Step 6: Deposit Funds and Prepare Margin

Once the contract specifications are confirmed, deposit the corresponding margin. Remember: Margin is only the entry cost, not the total investment amount. Actual losses can far exceed the margin.

Step 7: Learn to Read the Market and Identify Trading Signals

Futures traders usually focus on the most liquid contracts (typically near-expiry contracts). Methods to find trading signals include:

Fundamental analysis—study economic data, policy changes, industry trends.

Technical analysis—use candlestick charts, moving averages, MACD, and other indicators to find buy/sell points.

News analysis—monitor major economic events, central bank decisions, geopolitical developments.

Combine all three—to improve success rates and avoid being misled by a single factor.

Step 8: Decide on Trading Direction—Long or Short

Long strategy (bullish)

Expect asset prices to rise; buy contracts first, then sell when prices increase to profit from the difference. For example, bullish on US stocks, buy S&P 500 futures; bullish on oil, buy crude oil futures.

Short strategy (bearish)

Expect prices to fall; sell contracts first, then buy back at lower prices to profit. When anticipating market correction, central bank tightening, or oversupply of a commodity, shorting is a rational move.

The risk levels of long and short are equal; success depends on correct judgment.

Step 9: Set Stop-Loss and Take-Profit, and Strictly Follow Them

No matter how accurate your market judgment, sudden volatility always exists. Therefore, when establishing a position, decide:

When to take profit—close position once target profit is reached, avoid greed.

When to cut losses—exit immediately if losses exceed preset levels, to control damage.

Advice for beginners—set tighter stop-losses and smaller positions. As experience grows, adjust according to market conditions.

Discipline in execution outweighs all analysis. Many failed futures traders are not due to poor analysis but because of poor execution—softening when facing losses, hesitating to cut losses, or not taking profits when in profit.

VI. Complete Risk-Reward Analysis of Futures Trading

Advantages of Futures Trading

Highest capital efficiency—control large contracts with small margin, enabling leverage.

Two-way trading—capitalize on both bull and bear markets; short selling without borrowing stocks, low costs.

Hedging tool—stock investors can use short futures to hedge spot risks, protecting assets during market volatility.

Ample liquidity—international futures markets are highly active, allowing quick entry and exit with high transparency.

Risks and Disadvantages of Futures Trading

Leverage is a double-edged sword—it amplifies gains and losses. Unlimited loss liability means you could lose more than your initial capital.

Psychological challenge—high-frequency trading can be addictive; rapid gains or losses strongly stimulate emotions, leading to impulsive decisions.

Low entry barrier but high professionalism required—margin requirements are low, but the expertise needed far exceeds stock investing. Most participants are institutions or professional investors; retail traders are easily exploited.

Contract specifications are fixed—standardized contracts, with limited flexibility. Must close or roll over before expiration.

VII. New Option: CFD Combining Futures and Spot Market Advantages

Contracts for Difference (CFD) are a relatively new derivative instrument, especially suitable for investors with limited capital or risk tolerance.

Core Differences Between CFD and Futures

CFD is a private agreement between buyer and seller, tracking spot price movements, settled via price difference. The biggest advantage is no expiration date—you can hold indefinitely without worrying about rollover or forced settlement.

Compared to futures:

CFD Operation Tips

Set leverage scientifically—different underlying assets have different volatility. Forex has low volatility, so high leverage is suitable; stocks and commodities are more volatile, so reduce leverage accordingly.

Develop a comprehensive trading plan—not just mechanical buy low, sell high; establish a complete system including entry signals, stop-loss/take-profit mechanisms, position management, ensuring each trade is within controllable risk.

VIII. Final Checklist Before Starting Futures Trading

✓ Do you understand the leverage risks of futures?

✓ Do you have a complete and executable trading system?

✓ Can you strictly follow stop-loss discipline?

✓ Have you practiced thoroughly with a demo account?

✓ Is your initial capital sufficient to withstand a 10-20% loss?

✓ Are you clear whether you are a long-term hedge or short-term speculator?

One sentence summary: There are no absolute good or bad in futures, only suitability. Investors with a complete system and strict discipline can generate substantial returns; those without a system or self-control are likely to become market prey. Before entering the futures market, ask yourself which type you are.