Starting from Zero: A Complete Guide to Futures Trading Logic, Operations, and Risks

Stocks are the gateway for most investors to access the financial markets, but once you advance, you’ll inevitably hear the word futures. Some achieve wealth growth through futures trading, while others suffer huge losses due to improper operations. Is futures really a beast that floods and destroys, or is it a mythicized investment tool? Today, we’ll thoroughly clarify the essence of futures.

Why Futures Were Born—From Agricultural Risks to Financial Innovation

In the agricultural civilization era, natural disasters meant reduced harvests. Droughts, floods, locust plagues would lead to crop shortages and soaring prices; years of good weather would cause grain prices to drop, hurting farmers. Such price fluctuations were an uncontrollable disaster for farmers.

Ancient China’s response was government-set storage, purchasing during bumper years, and relief during lean years. But the Western world invented the contract mechanism earlier: buyers and sellers sign agreements now, stipulating future delivery dates and transaction prices. This allowed farmers to lock in income in advance, and merchants to plan costs ahead—this is the primitive form of futures.

Because only margin (not the full amount) needs to be paid, futures inherently possess leverage. Using small capital to control large trades is highly attractive, but risks are simultaneously amplified.

The Core Logic of Futures—Three Things You Need to Understand

What is a futures contract

A futures contract is a standardized agreement with all terms clearly defined by the exchange: underlying asset, trading quantity, price unit, delivery date, settlement method, etc. Buyers and sellers must trade at the agreed price on the specified future date according to the contract terms.

Futures underlying assets include:

• Stock indices: S&P 500, Dow Jones Industrial Average
• Commodities: Crude oil, gold, silver, copper, and agricultural products like wheat, corn, soybeans
• Financials: Exchange rates, interest rates, bond futures

Among these, US stock index futures have the highest trading volume because global investors pay close attention to US stock trends.

Spot vs. Futures—The Fundamental Difference

Spot assets are real assets tradable immediately (stocks, commodities, etc.), while futures are contractual commitments on future prices. Specific differences include:

Capital requirement: Spot requires full payment; futures only require margin (usually 5-10% of contract value), greatly lowering participation barriers.

Trading flexibility: Spot is a one-time buy/sell; futures can be closed at any time, allowing both long and short positions, making turnaround more flexible.

Time dimension: Spot has no expiration; you can hold indefinitely. Futures have a clear delivery date, upon which settlement is mandatory, incurring rollover costs if extended.

Price volatility: For the same price movement, futures leverage amplifies gains and losses multiple times.

Leverage is a double-edged sword

The most attractive feature of futures is leverage—using 10,000 yuan to control a position worth 200,000 yuan. But leverage isn’t an arbitrary profit amplifier; it also magnifies losses.

Suppose you invest 10,000 yuan margin to buy S&P 500 futures with a leverage ratio of 1:20. If the market rises 5%, you earn 10,000 yuan; if it falls 5%, you lose 10,000 yuan principal and even owe money. If the decline exceeds 10%, your margin is wiped out, and you need to add more funds; otherwise, the broker will forcibly close your position.

This is why strict stop-loss and take-profit mechanisms are crucial in futures trading—one wrong judgment can knock you out.

How to Play Futures—Practical Roadmap

Step 1: Clarify your risk tolerance and trading style

Some are suited for long-term holding, others excel at short-term swings. If you are a long-term investor, futures shouldn’t be your main tool but rather a hedging instrument. For example, if you hold Apple stocks but worry about a market downturn, you can short S&P 500 futures to offset potential losses.

If you are a short-term trader, choose highly liquid contracts (usually near-month or next-month contracts), as long-dated contracts tend to have lower volume and slippage.

Step 2: Choose a suitable trading platform

Futures are issued by exchanges (like CME Chicago Mercantile Exchange, NYMEX New York Mercantile Exchange, etc.), and retail investors need to open accounts through futures brokers. Good brokers should offer:

• Multiple tradable commodities
• Accurate quotes and fast execution
• Transparent, competitive fees
• Robust risk control systems

Step 3: Verify strategies with a demo account

90% of futures beginners should spend time practicing on a simulated account before real trading. Demo funds allow testing trading logic, understanding market fluctuations, without risking real money.

It’s especially important to set stop-loss and take-profit levels in advance. Beginners can start with micro futures (like micro S&P 500) to reduce risk with smaller contract sizes.

Step 4: Decide on trading instruments and contracts

Mainstream futures categories include six types:

The most liquid are US stock index futures and energy futures.

Step 5: Deposit funds and formulate trading strategies

After selecting the instruments, deposit funds according to margin requirements. For example, trading domestic stock index futures has clear margin standards; for US index futures, choose international futures brokers.

The core of your trading strategy is two words: direction. Do you expect the asset price to rise or fall?

The Two Basic Directions in Futures Trading—Long and Short

Going Long: Betting on Price Rise

If you believe oil prices will go up, buy CME crude oil futures. If oil prices indeed rise, the contract value increases, and you profit by selling.

Similarly, if you are optimistic about the Fed easing policy and a rebound in US stocks, you can buy S&P 500 futures. When the market rises as expected, close the position for profit.

Long positions are straightforward and intuitive, and are the most common trading approach for investors.

Going Short: Betting on Price Drop

This is a unique advantage of futures over stocks—both long and short are easy. Shorting stocks requires borrowing shares and paying fees, which is complex; but in futures, shorting is just as simple as going long.

If you think crude oil will crash, you can directly sell crude oil futures. When oil prices fall, your short position gains value, and closing it yields profit.

Or, if you worry that US government tightening policies will further depress stocks, you can sell Dow Jones futures. After confirming the decline, buy back to close.

The risk of shorting is that, in theory, prices can rise infinitely, and losses are unlimited. This emphasizes the importance of stop-loss.

The Risk Landscape of Futures Trading

Leverage amplifies risk

The most direct risk is leverage. A 5% price fluctuation can mean a 50% or even 100% change in your capital in futures. Traders without risk management can quickly get margin called.

Unlimited liability

The worst in stocks is losing your principal. In futures, only margin is paid; if prices move beyond the margin, you not only lose your deposit but may owe money to the broker. This is called a margin call. If you don’t top up within the deadline, your position will be forcibly closed.

Contracts have expiration dates

Futures cannot be held indefinitely; they must be settled at expiry. Long-term investors need to rollover (sell near-month contracts and buy longer-dated ones), which incurs additional costs and slippage.

Low entry threshold, but high actual requirements

Margin requirements do lower capital barriers, but futures demand higher professionalism—understanding leverage risks, contract rules, and liquidation mechanisms. Most futures traders are professional investors or institutions.

Liquidity risk

Not all futures have sufficient counterparties. Small or distant contracts may have sparse trading, leading to wide bid-ask spreads, which eat into your profits.

Hedging Applications of Futures—The Art of Risk Management

The most practical use of futures isn’t making money but hedging.

Suppose you hold a stock portfolio worth 1 million yuan, with gains accumulated. But upcoming Fed decisions, geopolitical risks, or earnings seasons cause concern about market volatility.

Instead of selling everything (which could trigger taxes and miss gains), you can hedge:

• Short futures on S&P 500 or NASDAQ 100 equivalent to your portfolio value
• If the market drops, your stocks lose value but futures gains offset the loss
• If the market rises, your futures position incurs a loss, but your stocks gain more, so overall you profit

This way, before major risk events, you spend a small amount to gain psychological peace and risk protection.

CFD (Contract for Difference)—An Advanced Choice in Futures

CFD is a derivative product that has emerged recently, combining features of futures and spot trading.

CFD trading logic: traders track the spot price and settle gains/losses via the bid-ask spread. No physical delivery or expiration date is involved, addressing some limitations of futures.

Differences Between CFD and Futures

Range of tradable assets: Futures are limited by exchange offerings; CFDs can cover stocks, forex, cryptocurrencies, indices—over 200 assets, offering much broader choices.

Trading flexibility: CFDs can theoretically be held forever (no expiration), and there’s no rollover cost. Contract specifications are flexible, and leverage ratios from 1x to 200x are available, much more adaptable than fixed futures contracts.

Lower costs: CFD margin requirements are usually lower, with more flexible leverage options, unlike futures which often require higher margins.

Key points for CFD operation

Leverage should match market volatility: When trading currencies with small fluctuations, high leverage is feasible; for stocks or commodities with large swings, lower leverage is prudent.

Develop a comprehensive trading plan: Besides defining long or short, set clear stop-loss and take-profit levels. The basic logic of buying low and selling high applies, but disciplined execution is key to profits.

Summary of Key Points

• Futures reduce participation barriers through leverage but also magnify risks
• Futures allow both long and short positions, offering more flexibility than spot, but require constant risk awareness
• Strict stop-loss and take-profit mechanisms are vital; one lapse can lead to total loss
• The most practical use of futures is hedging existing positions, not just seeking profits
• CFD, as a derivative tool, combines advantages of futures and spot, suitable for retail investors but also demanding risk management awareness
• Before real trading, thorough testing on demo accounts and psychological preparation are essential

Whether choosing futures or CFDs, remember one truth: There are no absolute opportunities in the market, only relative risks. Controlling risks will naturally lead to gains.