Complete Guide to Futures Trading | How to Start Buying and Selling Futures? Where is the Risk Bottom Line?

Quick Introduction to the Futures Market

Futures are standardized contract products where both parties agree to deliver or settle at a specified price at a future date on an exchange. These contracts cover a variety of underlying assets such as indices, commodities, foreign exchange, stocks, bonds, and more.

In Taiwan, the most active futures trading involves the Taiwan Weighted Index Futures. Market participants match buy and sell orders through the exchange, forming counterparties. Unlike the spot market, futures contracts have clear expiration dates, at which point the system will force liquidation or cash settlement.

Futures contracts are standardized by the exchange, which specifies key information such as product code, trading units, minimum price increments, trading hours, delivery dates, and settlement methods. These terms ensure market standardization and transparency.

Core Features and Risk Warnings of Futures Trading

5 Essential Points to Read Before Entering

Margin Trading Mechanism — Futures use a margin system, allowing investors to establish positions with only a small portion of the contract’s value. This design introduces leverage.

Advantages of Two-Way Trading — Unlike stocks, which require approval for day trading, futures trading allows for same-day buy and sell, with flexible long and short positions. Going long bets on rising prices, shorting bets on falling markets, with relatively low entry barriers.

High Leverage as a Double-Edged Sword — Leverage amplifies profits but also increases losses. Misjudgments may lead to margin calls or forced liquidation, and in extreme cases, owing money to the broker.

Contract Expiration and Forced Liquidation — Each contract has a clear delivery date. Traders must close or roll over positions before expiration; otherwise, the system will automatically liquidate and settle.

Cost Advantages and Risks Coexist — Futures fees are generally lower than stocks, and liquidity is ample. However, these advantages can tempt traders to overtrade or increase leverage, risking high-frequency trading pitfalls.

List of Hidden Risks in Futures Trading

— Leverage can cause sharp fluctuations in account net worth, potentially leading to total loss in extreme cases
— Controlling large contracts with only margin involves risks that are disproportionate to the principal
— While entry is easy, professional skills are required, including a complete trading system support
— Contract specifications are fixed, making flexible adjustments to trading volume and time span difficult

Starting from Zero: 6 Steps to Get Started with Futures Trading

Step 1: Define Your Trading Position

Ask yourself: Are you suited for long-term holding or frequent trading? Long-term investors should view futures as a hedging tool rather than a primary investment method. Short-term traders need quick decision-making and stop-loss execution skills. This step may seem simple but is the foundation for subsequent strategies.

Step 2: Choose a Licensed Futures Broker

Futures are issued by exchanges (such as Taiwan Futures Exchange, CME, etc.), and investors need to connect to trading systems via a broker’s futures department. Domestic futures products are limited (mainly Taiwan index and stock futures), while international futures offer a wide variety. When choosing a broker, consider: quote accuracy, fee levels, and the stability of electronic order systems.

Step 3: Use a Demo Account to Verify Trading Logic

Before depositing real funds, practice with a demo account. It provides virtual funds to test strategies, familiarize with the trading interface, and experience executing stops and profit targets. This is the lowest-cost way to identify risks and optimize your trading system.

Step 4: Understand Your Target Contract

After selecting a trading instrument, study its characteristics thoroughly. Futures underlyings are generally divided into six categories: indices, exchange rates, interest rates, metals, energy, and agricultural products. For example, the initial margin for Taiwan index futures is about NT$306,000, while mini Taiwan index futures require NT$76,500. Margin requirements vary significantly across different products, directly affecting capital allocation.

Step 5: Deposit Funds and Start Real Trading

After completing account setup and depositing funds, the key to success in futures trading is establishing a systematic trading plan. This includes: identifying entry signals based on technical or fundamental analysis, setting clear entry points, and strictly defining stop-loss and take-profit levels.

Step 6: Execute Trading Signals and Manage Risks

Futures traders tend to prefer trading near-month contracts (less active in far-months). After identifying entry points through technical analysis, execute long or short positions:

Long Strategy Example — Expecting oil prices to rise, buy crude oil futures, and sell for profit when prices increase; or optimistic about Federal Reserve’s bailout expectations, buy S&P 500 futures.

Short Strategy Example — Anticipating a sharp drop in oil prices, sell crude oil futures first, and close the position after confirming the decline; or expecting US stocks to continue falling, sell stock index futures.

Regardless of the direction, setting clear stop-loss and profit-taking points is non-negotiable. Beginners are advised to use shorter stop-loss distances and smaller positions, then gradually adjust as experience grows.

The Benefits and Costs of Futures Trading

Why choose futures trading?

Leverage — Amplifies capital efficiency with small investments
Flexibility of Long and Short — Easily short without borrowing securities
Hedging Tool — Hedge existing positions during stock market volatility to protect gains
High Liquidity — Frequent international market trading ensures smooth entry and exit

Costs and Risks of Futures Trading

Leverage is a Double-Edged Sword — It magnifies both gains and losses; extreme volatility can exceed margin limits
Unlimited Risk Commitment — Unlike stocks, which can only lose the invested principal, futures may result in owing money to the broker
High Professional Threshold — Requires mastery of technical analysis, fundamentals, and money management
Limited Contract Flexibility — Standardized contracts have fixed specifications, with limited room for adjustments

Contract for Difference (CFD): An Intermediate Choice Between Futures and Spot

CFD is another derivative instrument where both parties track the spot price and settle based on the price difference. Unlike futures, the key differences between futures trading and CFDs are:

Variety of Assets — CFDs can trade over 400 assets (stocks, forex, cryptocurrencies, etc.), while Taiwan futures have fewer options
Time Flexibility — CFDs have no expiration date and can be held indefinitely; futures require delivery at expiration
Cost and Entry — CFDs have more relaxed margin requirements and offer leverage from 1-200 times; initial margin ratios for futures are relatively fixed
Contract Size Diversity — CFD trading volume can range from 0.01 to 30 lots, while futures have a single standard size

Key Points for Using CFDs

Set Leverage Carefully — Reduce leverage for highly volatile assets; moderate leverage can be used for less volatile ones (like forex)
Pre-Plan Trades — Develop clear entry points, stop-loss levels, and profit targets to generate consistent gains within manageable risk

Summary: Approach Futures Trading Rationally

Futures trading is fundamentally a game of risk and opportunity. True profitability depends not on guessing market directions but on building executable trading systems, maintaining strict risk management, and continuously optimizing oneself. Leverage tools only amplify wealth when used correctly; otherwise, they become risk amplifiers. Start with demo trading, use small positions, and focus on protecting your principal—this is the right path to stable returns.