Complete Guide to Futures Trading | Master the Key Points of Leverage Trading from Scratch

I. Understanding the Essence of Futures Trading

What are futures? In simple terms, futures are standardized forward contracts where both parties agree to transact at a specific future date at the price agreed upon today. Unlike spot trading, which settles immediately, futures feature deferral, standardization, and centralized trading.

In the global financial markets, futures trading has become an essential tool for risk management and asset allocation. According to market data, the international futures market has a huge daily trading volume, attracting professional investors, hedge funds, and institutional investors.

II. Underlying Assets and Classifications of Futures Trading

Futures trading covers a wide range of underlying assets, divided into six main categories:

Index Futures — Based on stock indices, such as S&P 500, Dow Jones Industrial Average, NASDAQ 100, VIX Volatility Index, etc. The most common in Taiwan is the Taiwan Stock Exchange Capitalization Weighted Stock Index futures.

Currency Futures — Track exchange rates of various currencies, used to hedge against exchange rate risk.

Interest Rate Futures — Linked to government bond yields, including US 2-year, 5-year, 10-year treasury futures.

Metal Futures — Gold, silver, copper, platinum, and other precious and non-ferrous metals.

Energy Futures — Crude oil, natural gas, gasoline, heating oil, and other energy commodities.

Agricultural Futures — Wheat, corn, soybeans, cotton, cocoa, coffee, sugar, orange juice, and other soft commodities.

Among these, index futures and energy futures are the most popular among traders due to liquidity.

III. Core Elements of a Futures Contract

A complete futures contract should include the following essential information:

• Product Name and Code — Clearly identifies the underlying asset
• Contract Specifications — Defines the quantity of the underlying asset per contract
• Minimum Price Fluctuation — The value of one tick, determining profit or loss per price movement
• Trading Hours — Vary across exchanges and underlying assets
• Expiration Date — The deadline for closing or delivering the contract
• Settlement Method — Cash settlement or physical delivery
• Margin Requirements — The minimum funds needed to trade the contract

For example, in Taiwan’s major index futures, the initial margin is usually around NT$300,000; smaller futures are lowered to about NT$80,000, making them more accessible for retail investors.

IV. Key Concepts to Know Before Entering the Futures Market

Before starting futures trading, investors must understand these critical points:

Futures are Margin Trading Systems — You only need to pay a small portion (margin) of the total contract value to control the full position, creating leverage.

Futures Have a Mandatory Expiry Mechanism — Unlike stocks, which can be held long-term, each futures contract has a clear expiration date, after which it must be closed or delivered.

Bidirectional Trading Flexibility — No need for margin accounts like stocks; futures naturally support both long (buy) and short (sell) positions.

Leverage is a Double-Edged Sword — While it can amplify profits, it also magnifies losses. Establishing strict stop-loss and take-profit rules is crucial.

Unlimited Liability Risk — Unlike stocks, where the maximum loss is the invested capital, futures can lead to losses exceeding the initial margin, especially in extreme market conditions, requiring additional margin or forced liquidation.

Low Cost for Intraday Trading — Compared to stocks, futures have lower transaction fees, suitable for frequent trading strategies.

Therefore, having a comprehensive, executable trading system is the foundation of profitable futures trading. Capital and opportunities alone are not enough; discipline and systems are key to success.

V. The Nine Core Steps of Futures Trading

Step 1: Build Basic Knowledge of the Futures Market

Newcomers should first understand that futures contracts have expiration dates; only a margin is needed to trade the full contract; both long and short positions are possible; prices are transparent and public. These features determine the style and risk profile of futures trading.

Step 2: Determine Your Trading Style

Investors should reflect on their personality and experience. Long-term investors may find futures unsuitable as a primary tool and better suited for hedging. Short-term traders might adapt more easily to futures’ volatility and leverage. Understanding your risk tolerance and time commitment is the first step.

Step 3: Choose the Right Trading Platform

When selecting a platform, consider: whether it supports the target products; the speed of quote updates; fee levels; platform stability; regulatory compliance. Domestic markets have limited tradable products (mainly Taiwan index and stock futures), while international futures offer a much broader range. Different platforms have varying leverage ratios, minimum trading units, and margin requirements; choose based on your capital.

Step 4: Use Demo Trading for Validation

Before risking real money, repeatedly test your trading ideas in a simulated environment. Demo trading helps familiarize you with order procedures, technical analysis, and risk management tools without risk. This step is simple but crucial—many mistakes in live trading can be identified early in simulation.

Step 5: Decide on Underlying Assets

Before entering, research the specific features of the contracts you plan to trade. Different products have varying volatility, liquidity, and correlations. Index futures generally have the best liquidity and are suitable for beginners; individual commodity futures may be more volatile. Beginners are advised to start with the most liquid and less volatile products.

Step 6: Prepare Sufficient Margin

Margin requirements vary across brokers and products. For index futures, it may require tens of thousands to over a hundred thousand NT dollars. Important: do not use all your funds to buy a futures contract. Keep enough liquid capital to meet margin calls. A common guideline is to have 3-5 times the margin requirement in your account.

Step 7: Learn to Read Market Signals

Futures traders tend to focus on the most liquid contracts (usually near-expiry contracts, as longer-dated contracts have less liquidity). Market signals come from multiple dimensions:

Fundamentals — Economic data, policy signals, corporate earnings expectations.

Technical Analysis — Price trends, support/resistance levels, technical indicators.

News and Events — Major news, geopolitical risks.

Mastering these signals requires continuous learning and market observation. Start by deepening understanding in one dimension before expanding.

Step 8: Execute Long or Short Trading Decisions

Long Strategy: When expecting the underlying to rise, buy futures contracts; sell to close for profit as prices increase. For example, if expecting crude oil to rise, buy crude futures; if expecting US stocks to rise, buy S&P 500 futures.

Short Strategy: When expecting a decline, sell futures contracts; buy to close at lower prices for profit. For example, if expecting a stock market correction, sell index futures; if expecting a commodity to fall, sell that futures.

Futures shorting is simpler than stocks—just place a sell order, no borrowing or borrowing costs involved. This is a major advantage over stocks.

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

No matter how confident your trade idea, set exit points before entering. New traders should set relatively tight stop-losses and small positions. When the price hits the stop-loss, close immediately—no hesitation or hope.

Take-profit is equally important—many traders give back profits due to greed. Set reasonable profit targets based on your trading style and volatility. As experience grows, adjust your stop-loss and take-profit ranges gradually.

VI. Advantages and Disadvantages of Futures Trading

Core Advantages of Futures

Leverage Effect, High Capital Efficiency — Control large contracts with small capital, achieving high returns. For example, NT$10,000 margin might control contracts worth NT$500,000–NT$1,000,000.

Bidirectional Trading Flexibility — Unlike stocks, which mainly involve buying and hoping for rises, shorting is difficult and costly. Futures allow easy long and short positions, enabling profit in any market condition.

Hedging Tool — Investors can short futures to hedge against spot positions. For example, holding stocks and fearing a short-term correction, you can sell index futures for hedging.

High Liquidity and Transparent Trading — International futures markets are highly active, with efficient price discovery and small bid-ask spreads, especially beneficial for large capital investors.

Low Transaction Costs — Futures fees are much lower than stocks, suitable for frequent trading.

Main Risks of Futures

Leverage as a Double-Edged Sword — Amplifies gains but also magnifies losses. A wrong judgment can lead to significant losses.

Unlimited Liability Risk — Stocks can only lose the invested capital; futures can result in losses exceeding the margin. In extreme gaps, losses may far surpass expectations, requiring additional funds.

Forced Expiry and Settlement Risk — Each futures contract has an expiration date. If not monitored, forced liquidation or delivery can cause unexpected losses.

High Volatility Risks — Futures prices tend to fluctuate more violently than spot prices. Beginners may lose rationality amid volatility, violating discipline.

Entry Barriers and Professional Requirements — Although margins are relatively low, futures involve complex contracts, risk management, and market knowledge, demanding higher professional competence.

Standardized Contract Specifications — Futures are standardized; trading quantities, expiry dates, margin ratios are fixed. While mini and micro contracts exist, flexibility is less than in spot markets.

Therefore, futures are suitable for investors with some experience, strong risk awareness, and disciplined trading habits.

VII. Contract for Difference (CFD): A Middle Ground Combining Futures and Spot Advantages

CFD (Contract For Difference) is a financial derivative that lies between futures and spot trading. CFD is essentially a contract based on the spot price of the underlying asset, settled through the difference between buy and sell prices. No physical delivery occurs, and investors do not need to hold the actual asset.

Advantages of CFDs over Futures

Wide Range of Tradable Instruments — Due to regulatory and liquidity constraints, futures markets have limited products. CFD platforms typically offer hundreds of instruments across stocks, forex, cryptocurrencies, commodities, and more, providing much broader options.

More Flexible Trading Rules — CFDs have no mandatory expiry date; they can be held indefinitely, avoiding rollover or delivery issues. Contract specifications are flexible; traders can choose lot sizes (e.g., from 0.01 to 30 lots) freely.

Adjustable Leverage Ratios — Futures leverage is usually fixed by exchanges; CFD leverage is set and adjustable by the platform (from 1x to 200x), allowing risk-based flexibility.

Lower Entry Costs — Due to more flexible leverage, the required margin for the same trading size is often lower, making CFDs more suitable for retail investors.

Core Points of CFD Trading

First: Leverage Control is Paramount — CFDs also carry leverage risk. The level of leverage should match the volatility of the underlying. For low-volatility assets like forex, moderate leverage; for high-volatility assets like stocks or commodities, lower leverage to protect capital.

Second: Develop a Complete Trading Plan — Before entering, set clear entry/exit logic, stop-loss, and take-profit points, and strictly follow them. Do not change plans impulsively due to short-term price swings. The flexibility of CFDs requires greater discipline—without expiry constraints, traders risk holding endless positions or frequent adjustments.

VIII. Final Summary of Futures Investment

Whether trading futures or CFDs, successful investors share these traits:

• Strong Discipline — Strictly follow set rules, unaffected by emotions or market swings
• Continuous Learning — Regularly review trading records, learn from successes and failures
• Prioritize Risk Management — Always consider potential losses before profits
• Good Psychological Resilience — Stay calm during losses, humble during gains

Futures is a high-opportunity, high-risk market. For beginners, starting with demo trading, small capital testing, and gradually gaining experience is the safest approach. Remember: The ultimate goal of trading is not to win a few big trades, but to earn steadily and consistently. When this goal is clear, all trading decisions become simpler and more confident.