Starting from Zero: A Complete Guide to Futures Trading, Risk Analysis, and Practical Skills

I. You Must Understand What Futures Are First

What are futures? Simply put, they are contracts where both parties agree on a transaction at a specific future date at the price agreed upon today. The underlying asset can be stock indices, foreign exchange, raw materials, precious metals, energy, or agricultural products.

Unlike spot trading, futures trading has three core features:

First, contracts have an expiration date. You cannot hold them indefinitely; at expiration, you must close the position according to the rules, either through physical delivery or cash settlement.

Second, only margin is required. You do not need to pay the full value of the contract, only a certain percentage as margin, which is the source of leverage.

Third, both long and short positions are possible. In the stock market, you mainly buy expecting prices to rise; in futures, you can buy (go long) or sell first and buy later (go short), making trading more flexible.

II. Key Tips You Must Read Before Trading Futures

Before entering the market, you must understand the following points:

Leverage is a double-edged sword. It can amplify your profits but also proportionally increase your losses. If the market moves against you, your principal can evaporate quickly, and you may face margin calls or liquidation risks.

Risks are much higher than stocks. Buying stocks can at most wipe out your principal, but futures require only margin, and the contract value is magnified by leverage. In extreme conditions, you might even owe money to the broker.

Discipline is a matter of life and death. Many futures traders fail due to emotional trading. Without strict stop-loss and take-profit mechanisms, no matter how perfect your system, you can be wiped out in a major market fluctuation.

High-frequency trading has hidden traps. Futures have low entry barriers, tempting beginners with short-term volatility. Frequent trading can erode profits through commissions and increase risk exposure.

III. Specific Details of Futures Contracts

Each futures contract is precisely regulated by the exchange. Before opening an account, you need to understand these elements:

• Product code: Each contract has a unique trading code
• Contract specifications: Defines the quantity of the underlying asset per contract
• Minimum price fluctuation: The smallest price increment per quote
• Trading hours: Set according to different assets
• Expiration date: The deadline for mandatory settlement
• Settlement method: Physical delivery or cash settlement

For example, Taiwan’s major TAIEX futures (FITX) require an initial margin of about NT$300,000, while mini TAIEX futures (FIMTX) require about NT$76,000. Choosing the right contract size is crucial for beginners.

IV. Practical Path to Start Trading Futures

Step 1: Build a Basic Understanding of the Futures Market

Grasp the core mechanisms: expiration limits, margin requirements, leverage features, and support for both long and short positions. These characteristics determine the risk and return profile that differs sharply from stocks.

Step 2: Assess Your Trading Style

Review your past investment habits. If you prefer long-term holdings, futures may not be suitable as a primary investment tool because rolling over positions increases costs. Futures are better suited for short-term trading or hedging.

Step 3: Choose a Suitable Trading Platform

International futures are mainly traded on CME (Chicago Mercantile Exchange), NYMEX (New York Mercantile Exchange), Singapore Exchange, etc. Domestic trading is primarily through Taiwan Futures Exchange. Investors typically open accounts via futures brokers, who provide electronic order systems connecting to exchanges and clearinghouses.

Criteria for choosing a futures broker include: diverse product offerings, accurate and fast quotes, low commissions, and stable, professional service.

Step 4: Test Strategies with a Demo Account

Before risking real money, repeatedly test your trading logic on a demo platform. Simulated trading helps verify risk management effectiveness, familiarize with order execution, and identify potential flaws in your strategy.

Step 5: Clarify Which Contracts to Trade

Futures underlying assets mainly fall into six categories: index futures (S&P 500, NASDAQ 100, etc.), interest rate futures (various government bonds), grain futures (wheat, corn, soybeans), metal futures (gold, silver, copper), energy futures (crude oil, natural gas), soft commodities (cotton, coffee, sugar).

Prioritize liquid contracts, especially near expiration. Distant contracts tend to have lower liquidity and wider spreads.

Step 6: Deposit Funds and Set Initial Margin

Deposit margin after logging in. Margin requirements vary: for example, large TAIEX futures need about NT$300,000; gold futures about US$2,330. Confirm the amount before depositing to avoid insufficient funds.

Step 7: Learn to Read the Market and Capture Signals

Futures traders often combine fundamental and technical analysis to determine price direction. If trading stock futures, the approach is similar to stocks, but since expiration dates exist, it’s recommended to enter positions as technical signals are about to trigger, increasing the probability of correct timing.

Step 8: Decide on Long or Short Positions

Long scenario: Expect asset prices to rise. For example, bullish on US stocks, buy S&P 500 futures; expect oil prices to go up, buy crude oil futures. If prices increase as expected, the contract value rises, and you can profit by selling.

Short scenario: Expect asset prices to fall. For example, bearish on stocks, sell Dow futures; expect oil prices to crash, sell crude oil futures. When prices decline, your short position gains value, and you profit when closing.

Step 9: Set Stop-Loss and Take-Profit Levels

This is the most critical step. Regardless of bullish or bearish outlook, market volatility is normal. Predefine acceptable loss levels (stop-loss) and profit targets (take-profit), and strictly adhere to them.

New traders should set tighter stop-losses and smaller positions. As experience grows, adjust according to market conditions. Remember: staying alive is the priority; risk control always comes first.

V. The Advantages and Risks of Futures Trading

Main Advantages of Futures

High capital efficiency. Leverage allows controlling large contract values with a small amount of capital, achieving “small capital, big position.”

Flexible trading directions. Short selling stocks requires borrowing and paying fees; futures shorting is easier, just watch expiration dates.

Hedging tool. If you hold physical assets but worry about short-term volatility, you can hedge with futures, protecting your holdings.

Ample liquidity. International futures markets are highly active, with quick matching and high transparency, suitable for large funds seeking substantial investment targets.

Main Risks of Futures

Leverage is a double-edged sword. While profits are magnified, so are losses. Wrong market direction can lead to losses multiplied exponentially.

Unlimited loss potential. Stocks can at most wipe out your principal, but futures, due to margin use, can result in losses exceeding your initial deposit, even owing money to the broker.

Low entry barrier is deceptive. Although margin is small, futures require much more professionalism than stocks. Inexperienced retail traders often become “chives” (victims) in the market.

Contract specifications are fixed and inflexible. Futures are standardized contracts with set trading volume, expiration dates, and margin ratios. While mini contracts exist, overall flexibility is less than spot or CFD trading.

VI. Derivative Tools Comparison: What Are CFDs?

Besides futures, another financial derivative worth understanding is Contract for Difference (CFD). It also involves leverage but is structurally more flexible and more suitable for retail investors.

CFD is an agreement where both parties track the spot price; they settle only the price difference, without physical delivery. The key difference: CFD has no expiration date. You can hold it indefinitely without worrying about delivery or rollover costs.

Compared to futures, CFD advantages include:

Wide range of trading instruments. Many platforms offer CFDs on over 400 financial markets, including stocks, forex, cryptocurrencies, and commodities, far more than traditional futures.

Flexible specifications. Minimum trade sizes can range from 0.01 lots to 30 lots, with adjustable leverage, accommodating different capital scales.

Lower entry costs. Due to more flexible leverage ratios, initial margin requirements are much lower than futures contracts.

Trading plan remains essential. CFDs also require setting stop-loss and take-profit levels, devising comprehensive strategies, and managing risks. Adjust leverage based on volatility—higher leverage for low-volatility forex, lower for high-volatility stocks or commodities.

VII. Building a Complete Trading System as the Foundation for Long-Term Profitability

Whether trading futures or CFDs, success depends not on individual trades but on establishing a comprehensive, executable trading system.

This system should include:

• Clear entry signal logic
• Strict risk management (stop-loss levels)
• Rational position sizing
• Exit rules (discipline in taking profits and cutting losses)
• Regular review and optimization of strategies

Remember, futures trading is not gambling but a discipline and patience contest. Many fail due to emotional decisions rather than flaws in their strategies. Building a system is easy; sticking to it long-term is the real challenge.

Start with thorough learning, simulation testing, small-scale practice, and gradual scaling—this is the path most successful futures traders have taken.