Futures Trading from Scratch: What Are Futures, How to Play, and How to Avoid Risks

Many novice investors, after getting involved in stocks, will quickly hear the concept of futures. But what exactly are futures? Why do some make huge profits from them, while others lose everything? This article will help you deeply understand the essence of futures trading.

What are futures? A one-sentence explanation

Futures are standardized contracts where both parties agree to buy or sell a specific quantity of an underlying asset at a predetermined price at a future date. This “underlying asset” can be soybeans, gold, crude oil, or even stock indices, exchange rates, or bonds.

Key point: You only need to pay a margin to lock in the trade, not the full amount. This is the biggest difference between futures and spot trading.

The history of futures: starting from agricultural risks

Futures originated closely related to agriculture. Early farmers faced huge market risks—grain prices plummeted during bumper harvests, and prices soared during poor harvests. To hedge against these uncontrollable price fluctuations, merchants and farmers began signing contracts: agreeing on a fixed price now for delivery of grain next year.

This simple idea evolved into the modern futures market. Compared to ancient China’s government warehouses used to stabilize prices, Western countries discovered earlier the use of contractual tools to manage risk.

What’s the difference between futures and spot?

Simply put, futures allow you to control large positions with a small amount of capital, while spot trading involves paying the full price for what you buy.

What information does a futures contract contain?

Each futures contract clearly specifies:

• Underlying asset name and code
• Trading quantity (contract size)
• Minimum price fluctuation
• Trading hours
• Expiration date
• Delivery method (physical or cash settlement)

These details determine your operational space and risk level.

How to trade futures? 5 beginner steps

Step 1: Clarify your trading style

First, ask yourself: Are you a long-term investor or a short-term trader?

• Long-term investor: Futures are not your main tool, only used for hedging (e.g., holding stocks and using futures short positions to offset downside risk)
• Short-term trader: You can actively trade futures, leveraging to amplify short-term gains

Step 2: Choose a reputable futures broker to open an account

Futures are standardized products issued by exchanges, and you need a licensed broker to participate. Different regions have different exchanges:

• Taiwan Futures Exchange (local Taiwan index futures)
• CME (U.S. stock index futures)
• NYMEX (energy futures)
• SGX (cross-market futures)

Core criteria for choosing a broker: safety first, accurate quotes, competitive fees.

Step 3: Practice with a demo account

99% of beginners should start practicing with virtual funds. Through simulated trading, you can:

• Test whether your strategies are truly profitable
• Familiarize yourself with the trading platform interface
• Experience psychological pressure (even with virtual funds)

Most importantly, establish strict stop-loss and take-profit rules during the demo phase.

Step 4: Select trading assets

Main futures categories include:

Index futures: S&P 500, Nasdaq 100, Dow Jones Industrial Average, etc.

Agricultural futures: wheat, corn, soybeans, cotton, sugar, coffee, etc.

Metal futures: gold, silver, copper, platinum, etc.

Energy futures: crude oil, natural gas, heating oil, gasoline, etc.

Interest rate futures: government bonds of various maturities

Beginners are advised to start with the most liquid and relatively stable products (e.g., mainstream index futures).

Step 5: Deposit funds and develop a trading plan

Before depositing, understand the minimum margin requirements for the futures contract. When creating your trading plan, include:

• Your market outlook and basis
• Entry price
• Stop-loss level
• Take-profit level
• Maximum loss as a percentage of total funds (recommended no more than 2%)

Going long or short? Two basic operations

Going long (bullish): Expect asset prices to rise

Example: You believe U.S. stocks will rebound, and the central bank will inject liquidity. You buy U.S. stock index futures, waiting for the rise to sell and profit.

Going short (bearish): Expect asset prices to fall

Example: You think oil prices will crash soon, so you sell oil futures contracts first. If oil prices indeed fall as expected, you buy back at a lower price, earning the difference.

The beauty of futures is that both operations are equally easy—unlike stock shorting, which requires borrowing shares and paying interest.

Why do some choose futures? The advantages

1. Leverage for high returns with small capital

Margin allows you to control a position worth ten times your capital. This is the most attractive feature of futures.

2. Flexible long and short operations

Stock shorting is difficult, but futures trading makes both directions simple. When the market rises, go long; when it falls, go short—no missed opportunities.

3. Hedging existing risks

Suppose you hold stocks worth 1 million yuan but worry about a market downturn. You can short S&P 500 futures to hedge. Even if the market drops, profits from futures can offset stock losses.

4. Sufficient liquidity

Global futures markets have many participants, frequent trading, and tight bid-ask spreads. For large funds, entering and exiting positions quickly is easy.

The risks of futures: the harsh truth

1. Leverage is a double-edged sword

Leverage amplifies gains and losses. You might earn 10 times, but also lose 10 times. This is why many futures beginners get liquidated.

2. Unlimited potential losses

You can lose all your principal in stocks, but futures require only margin. If prices move extremely against you, you might owe money to the broker. Theoretically, losses are unlimited.

3. Margin calls and forced liquidation

When prices move unfavorably, brokers will require additional margin (margin call). If you cannot meet the requirement, your position will be forcibly closed, locking in losses.

4. Contracts have expiration dates

Unlike stocks, which can be held indefinitely, futures must be closed or delivered before the expiry date. Forgetting this can force you to take delivery.

5. Low entry barrier but high actual requirements

Although the initial margin is relatively low, futures trading demands strong technical analysis, psychological resilience, and risk management skills. That’s why most participants are professional institutions rather than retail investors.

Risk management: the lifeline of futures investing

To survive long-term in futures markets, you must:

Set stop-loss and take-profit levels: Decide in advance how much profit to take and how much loss to accept. Don’t rely on “waiting for a rebound.”

Control position size: Max loss per trade should not exceed 2% of total funds.

Choose highly liquid contracts: Distant-month contracts have lower liquidity and are easier to get stuck in. Stick to near-month contracts close to delivery.

Review regularly: Record each trade’s entry, exit, and reasons for profit or loss. This is the only way to improve.

Psychological preparation: Futures amplify your fears and greed. If you cannot tolerate 10% intraday swings, futures may not suit you.

Contracts for Difference (CFD): another option outside futures

CFDs are instruments between futures and spot trading. They retain the advantages of futures (leverage, long and short flexibility) but improve on some shortcomings:

Advantages of CFDs:

• No delivery date, can be held indefinitely
• Broader range of trading products (some platforms offer 200+)
• Flexible contract sizes, leverage from 1 to 200 times
• Lower margin requirements

Disadvantages of CFDs:

• Liquidity may be less than standard futures
• Requires understanding the platform’s risk management mechanisms

CFDs are more suitable for retail investors with smaller capital and diversified trading interests. But risks exist—leverage, if mismanaged, can also lead to liquidation.

Final words

What are futures? They are a tool of power, allowing you to leverage assets for growth, but also exposing you to unlimited losses.

Before trading futures, ask yourself three questions:

1. Do I truly understand the risks involved?
2. Do I have strict trading discipline and risk management systems?
3. Can my funds withstand this volatility?

If the answer is “yes,” then futures might become your powerful weapon. If you’re still hesitant, spend three months practicing with a demo account to test your strategies. The futures market won’t run away, but your principal might.