Complete Guide to Futures Trading | Learn Futures from Scratch, How to Avoid Liquidation Traps?

I. Understanding the Essence of Futures

Futures are standardized contracts where both parties agree to transact at a predetermined price on a specific future date. The underlying assets of futures are diverse, including stock indices, foreign exchange, interest rates, precious metals, energy commodities, and various financial assets.

In exchanges, buyers and sellers post bids and match transactions, but the biggest difference from spot trading is—futures trading features margin and leverage. Investors only need to pay a portion of the margin to control a contract value multiple times larger, which is the main attraction of futures but also the source of risk.

II. Characteristics and Advantages of Futures Trading

Leverage trading is a double-edged sword

Futures provide leverage effects, allowing investors to control larger positions with less capital—this is the concept of “small investment for big gains.” Taking Taiwan’s most popular Taiwan Stock Index Futures as an example, investors only need to pay margin to enter, greatly improving capital efficiency.

However, it’s important to note that leverage not only amplifies profits but also magnifies losses. If the judgment is wrong and stop-loss is not executed in time, the account may face margin calls or even liquidation.

Flexibility of long and short operations

Unlike the stock market, which can only go long, futures trading allows easy short selling. When you expect prices to fall, you can directly sell futures contracts, and profit from the decline by closing the position after the price drops. This bidirectional flexibility makes futures an excellent hedging tool.

High liquidity and trading cost advantages

International futures markets are highly active, with high liquidity and transparency, and transaction fees are generally lower than stock trading. For investors with ample funds seeking sufficient investment targets, futures markets offer an efficient trading environment.

III. Core Elements of Futures Contracts

Each futures contract clearly specifies the following details:

Each futures broker publishes margin requirements on their official website. For example, in Taiwan:

IV. Five Key Points Every Futures Trader Must Know

Before entering, remember these points—they directly impact your trading success:

1. Futures are contract-based trading — predetermined delivery date and price, not for trading at any time.
2. Margin system has leverage features — small capital can control large positions, with associated risks and opportunities.
3. T+0 unlimited trading — can buy and sell within the same day, and switch between long and short.
4. Contract prices are a leading indicator of spot prices — futures often lead spot markets, helping investors anticipate market trends.
5. Leverage is a double-edged sword — misjudgment can lead to rapid margin calls or liquidation.

V. Nine Steps for Futures Beginners

Step 1: Master the basics of the futures market

Understand the core concepts—contracts have expiration dates, require margin to enter, feature leverage, and allow both long and short operations. These fundamentals are prerequisites for all subsequent actions.

Step 2: Assess your investment style

Review past investment experience and ask yourself whether you prefer long-term holding or short-term trading. If you favor long-term, futures are more suitable as hedging tools rather than primary investments; if short-term, you can leverage futures’ flexibility.

Step 3: Choose a suitable futures broker to open an account

Futures are issued by exchanges, and investors enter through brokers’ electronic trading systems. Local brokers in Taiwan include Yuanta, KGI, Fubon, etc., while international brokers offer a broader range of products. Criteria for choosing include: diverse product offerings, accurate and fast quotes, and low commissions.

Step 4: Verify strategies with a demo account

After opening an account, don’t rush to deposit real money. Use a demo account to practice trading. Repeatedly test your trading logic, see if it can generate profits, and familiarize yourself with the platform interface.

Step 5: Select futures products to trade

After practicing with a demo and finding feasible strategies, choose target assets. Futures trading mainly divides into six categories: index futures (e.g., S&P 500, Taiwan Index), interest rate futures, grain futures, metal futures, energy futures, and soft commodities. Focus on liquid products for smoother trading.

Step 6: Deposit margin

Based on the selected contract, check the minimum margin requirement and transfer the corresponding funds to the broker. Remember, margin is just an entry ticket; the contract value is much higher, and leverage determines your risk exposure.

Step 7: Learn to monitor the market and capture signals

Successful futures traders understand how to use fundamental analysis, economic data interpretation, or technical analysis to forecast price movements. Especially for stock futures, the trading logic is similar to individual stocks, but pay attention to expiration dates. Enter when technical signals are about to trigger, as this makes market direction easier to grasp.

Step 8: Decide to go long or short

Long — buy futures expecting prices to rise, then sell to realize profits. For example, bullish on oil prices, buy crude oil futures; optimistic about US stocks rebounding, buy S&P 500 futures.

Short — sell futures expecting prices to fall, then buy back to realize profits. For example, anticipate oil prices plummeting, sell crude futures; expect stock markets to decline, sell index futures.

Step 9: Set stop-loss and take-profit points

Regardless of long or short, markets can be highly volatile. New traders must set stop-loss and take-profit levels before opening positions and strictly adhere to them. Start with tighter stops and smaller positions, then adjust parameters as experience grows.

VI. Risk Assessment in Futures Trading

Four major risks of futures

Leverage risk — Leverage amplifies investment results, causing sharp profit or loss swings. Stocks can lose all capital, but futures require only margin, and in extreme volatility, may even result in owing money to the broker.

Expiration risk — Futures have clear delivery deadlines; positions must be closed or delivered by expiry. Unlike spot, which can be held indefinitely. Ignoring expiry can lead to forced liquidation.

High-frequency trading risk — The T+0 mechanism and low fees can encourage overtrading. Frequent entries and exits increase transaction costs and the chance of misjudgment.

High entry barrier — Although margin requirements are relatively low, futures are more professional than stocks, requiring solid knowledge and mature risk management skills.

Key to success: a complete trading system

Relying solely on luck in futures trading is insufficient. Establish a comprehensive, executable trading system and strictly follow discipline—this is the foundation of consistent profits. The system should include:

• Clear entry signals and standards
• Scientific position sizing rules
• Pre-set stop-loss points
• Rational take-profit mechanisms
• Contingency plans for market anomalies

VII. Contract for Difference (CFD): A More Flexible Derivative Option

Contract For Difference (CFD) is a financial derivative that lies between futures and spot trading. Buyers and sellers establish a contract tracking the spot price, settling gains or losses based on the price difference, without physical delivery.

( Differences between CFD and futures

Compared to futures, CFDs have three main advantages:

Broader trading options — Taiwan’s available futures are limited, but CFD platforms typically offer over 400 financial instruments, including stocks, forex, cryptocurrencies, commodities, etc.

Greater trading flexibility — CFDs theoretically have no expiry date, can be held indefinitely; leverage ratios are adjustable (usually 1-200x); minimum trade sizes are lower (from 0.01 lot). Futures contracts have fixed specifications and less flexibility.

Lower entry costs — Due to more flexible leverage and smaller contract sizes, initial capital requirements are lower.

) Key points for CFD trading

Set leverage cautiously — Leverage correlates with underlying volatility. For low-volatility assets like forex, high leverage (50-100x) can be used; for volatile stocks or commodities, lower leverage (5-20x) is advisable to prevent margin calls from small price swings.

Plan trading strategies in advance — Whether trading CFDs or futures, develop a complete trading plan beforehand. Include entry points, stop-loss points, profit targets, position sizes, etc. Once trading begins, execute strictly according to the plan.

Conclusion: Futures and CFDs are magnifying tools in finance, and the power lies in the investor’s hands. Using them correctly can significantly increase returns; misusing them can lead to rapid losses. Successful traders share a common trait—having a clear trading system, disciplined execution, and continuous learning. Before trading, thoroughly practice with demo accounts and fully understand the risks before investing real funds.