Deep Understanding of Futures Trading | From Basic Concepts to Practical Operation Guide

What Are Futures? Quick Understanding of Core Concepts

What are futures? In simple terms, futures are contracts where both parties agree to buy or sell an asset at a predetermined price at a specific future date. The underlying assets of futures include commodities, raw materials, foreign exchange rates, stocks, bonds, indices, or other financial products.

Unlike spot trading, futures trading occurs on exchanges, which standardize contract details. Futures contracts specify important information such as the product code, trading volume, minimum price fluctuation, trading hours, expiration date, and settlement method. Most importantly, futures are margin trading with high leverage, allowing investors to control large contracts with only a small portion of the contract value as margin.

Why Understand Futures? Benefits and Risks Coexist

Core Advantages of Futures Trading

Futures offer several advantages over traditional stock investments. First is leverage trading, which improves capital efficiency—controlling larger contract values with less capital, achieving more with less. Second, long and short positions can be traded flexibly, without needing to apply for short-selling qualifications or pay borrowing fees; simply selling short is possible. Third, futures are highly liquid, especially in international markets with frequent trading and high transparency. Lastly, hedging functions enable investors to protect existing positions against spot price fluctuations.

Core Risks of Futures Investment

However, leverage is a double-edged sword. If the market moves against your judgment, losses can be magnified. Unlike stocks, where you can lose at most your principal, futures involve only the margin, but the contract value is leveraged, meaning investors bear unlimited liability. In extreme volatility, you could even owe money to the broker. Additionally, futures contracts have expiration dates, and at expiration, they are forcibly settled, which adds operational complexity.

Essential Pre-Investment Education: Awareness and Preparation

Step One: Build a Foundation of Futures Knowledge

Before investing, you must understand key points: futures have clear expiration dates; trading starts with margin; both long and short positions are available; contract price trends reflect spot market directions; leverage amplifies both gains and losses; high-frequency trading and high leverage are primary risk sources.

The key is, successful futures trading relies on having a complete, executable trading system and strictly following it. Trading without rules only leads to losses.

Step Two: Determine Your Trading Style

Review your past investment experience to judge whether you are more suited for long-term or short-term trading. Long-term investors generally should not use futures as their main tool but rather as a hedging instrument. Short-term traders can utilize futures’ flexible trading features.

Step Three: Choose a Suitable Futures Broker

Futures are issued by exchanges such as the Taiwan Futures Exchange, CME (Chicago Mercantile Exchange), NYMEX (New York Mercantile Exchange), etc. Investors need to open a futures account with a broker, who provides an electronic order system for trading.

Local Taiwanese futures brokers include Yuanta Futures, KGI Futures, Capital Futures, Fubon Futures, Cathay Futures, etc. For international futures trading, select brokers offering products like forex, metals, energy, etc. A good futures broker should offer a wide range of products, accurate and fast quotes, and low commissions.

Step Four: Verify Strategies with a Demo Account

After opening an account, start with simulated funds to test your trading strategies in the market. Before real trading, always set stop-loss and take-profit points and strictly execute them, as leverage magnifies all outcomes. Beginners are advised to practice with mini futures first.

Real Trading: From Selecting Underlying Assets to Executing Trades

Confirm the Futures Contract to Trade

After practicing with simulations and finding profitable or hedging methods, before entering the real market, understand the nature of the underlying assets. Futures mainly fall into six categories: indices, exchange rates, interest rates, metals, energy, and agricultural products.

Futures traders tend to choose highly liquid underlying assets, usually near-term contracts, as longer-dated contracts tend to have lower liquidity.

Deposit Funds and Prepare to Trade

Before starting, deposit the margin (initial margin). Each futures contract has a minimum margin requirement. For example, in Taiwan, large TAIEX futures require about NT$306,000, while mini TAIEX futures need about NT$76,500. For US stock index futures like Nasdaq 100, the margin is around NT$98,000. Check the specific requirements on the broker’s website or trading platform.

Learn to Read Charts and Identify Trading Signals

Finding trading signals is key to successful trading. Investors use fundamental analysis, economic news, or technical analysis to forecast future price movements. For stock futures, research company and market fundamentals. Since futures have expiration dates, it’s recommended to enter when technical signals are about to trigger, making market direction easier to grasp.

Confirm Trading Direction: Long or Short

Going long means expecting the asset price to rise; buy futures contracts accordingly. For example, if you expect oil prices to rise, buy crude oil futures; if prices go up, you can sell for profit. If you anticipate a rebound in US stocks, buy S&P 500 futures.

Going short is the opposite: if you expect prices to fall, sell first. For example, if you predict a crash in oil prices, sell crude oil futures; when prices drop, close the position for profit. If you expect a stock market decline, sell stock index futures.

Set Stop-Loss and Take-Profit Mechanisms

Whether long or short, markets can be highly volatile, so planning stop-loss and take-profit points is crucial. Beginners should set shorter stop-loss levels and smaller positions. As experience grows, adjust stop-loss and take-profit levels based on market conditions.

Advanced Futures: CFDs as a Supplementary Tool

Contracts for Difference (CFD) are derivatives combining features of futures and spot trading. CFDs are agreements between buyers and sellers based on the spot price, settled by the difference in price, without physical delivery or expiration date.

Advantages of CFDs Compared to Futures

CFD trading offers a broader range of products, including stocks, forex, cryptocurrencies, and commodities—over 400 markets. Trading is more flexible, with no delivery date restrictions, more options, and adjustable leverage (usually 1-200x). Entry costs are lower because leverage ratios are more flexible, unlike the fixed initial margin requirements of futures.

Key Points in CFD Trading

First, control leverage carefully. When trading currencies with lower volatility, higher leverage can be used; for high-volatility assets like stocks or commodities, lower leverage is recommended. Second, develop a comprehensive trading plan before investing, including stop-loss and take-profit mechanisms, to maintain controlled risk and generate consistent returns.

Summary: Keys to Success in Futures Trading

Whether trading futures or CFDs, the core of successful investing is risk management and disciplined execution. Building a complete trading system, setting strict stop-loss points, choosing appropriate leverage according to your risk tolerance—these are the foundations of long-term profitability. Market opportunities always exist, but capital preservation must always come first.