A comprehensive guide to futures trading: from zero basics to risk management strategies

What is Futures? Why Are Investors Talking About It?

Futures are essentially a contract, not the direct buying or selling of the commodity itself. This contract specifies core terms such as the underlying asset, transaction price, and delivery date, with both parties agreeing to settle at a predetermined price on a future date.

The underlying assets of futures are extremely diverse: physical commodities like agricultural products, energy, metals, as well as financial assets such as exchange rates, stock indices, and bonds. For example, in the US market, S&P 500 futures and Dow Jones futures are the most actively traded, attracting investors worldwide.

Unlike stocks, futures only require a margin (usually 5-10% of the underlying asset’s value) to control the entire contract, which is known as leverage—using a small amount of capital to control a large position. However, this also amplifies both gains and losses.

Where Do Futures Come From? A Historical Background

Tracing back through history, futures originated in agricultural civilizations. Farmers faced risks from natural disasters—droughts and floods could directly impact harvests, leading to sharp price swings. To hedge against this uncontrollable risk, Western merchants created an innovative mechanism: both parties agree to buy a specific amount of crops at a fixed price at a future date.

The beauty of this mechanism is that it allows farmers and merchants to eliminate price uncertainty. Over time, this model evolved into the modern futures market, becoming a vital part of the global financial system.

What Are the Key Elements of a Futures Contract?

A standard futures contract must clearly specify:

• Commodity code and name: for quick identification in trading systems
• Trading specifications: the quantity of the underlying asset represented by one contract (e.g., 100 ounces of gold)
• Minimum price fluctuation: the smallest price movement per quote
• Trading hours: vary depending on the asset type; for example, stock index futures and energy futures have different trading sessions
• Expiration date: the date by which the contract must be settled or delivered
• Settlement method: cash settlement or physical delivery

These elements are uniformly regulated by the exchange, and investors can find all contract details on the trading platform of the futures broker.

Futures vs Spot Trading: Three Major Differences in Trading Methods

In spot trading, you pay exactly what the asset costs. Futures use a margin system, allowing retail investors to participate in large trades, but also increasing risk.

How to Start Trading Futures? A Seven-Step Guide

Step 1: Master Basic Concepts
Understand the core features of futures—expiration date, margin, leverage, and long/short trading. These are essential before entering the market.

Step 2: Determine Your Trading Style
Assess your investment approach. Long-term investors typically use futures for hedging rather than as primary tools, while short-term traders need high professionalism and mental resilience.

Step 3: Open an Account with a Reputable Futures Broker
Major global futures exchanges include CME (Chicago Mercantile Exchange), NYMEX (New York Mercantile Exchange), and Singapore Exchange. Individual investors need to open accounts through futures brokers, who act as intermediaries connecting exchanges, clearinghouses, and investors. Choosing a broker with low commissions, fast quotes, and a wide range of products is crucial.

Step 4: Practice with a Demo Account
Most platforms offer demo accounts. Beginners must first verify their trading strategies with virtual funds, understand how leverage affects real trading, and gain experience before risking real money.

Step 5: Research Target Underlying Assets
Futures can be divided into six categories: index (S&P 500, NASDAQ 100), interest rates (government bond futures), metals (gold, silver, copper), energy (crude oil, natural gas), agricultural products (wheat, soybeans), and soft commodities (cotton, coffee).

Choosing highly liquid contracts is important; liquidity means smaller bid-ask spreads and faster execution. Contracts nearing expiration generally have better liquidity than longer-dated ones.

Step 6: Deposit Funds and Set Trading Parameters
Deposit margin into your futures account; different contracts have different margin requirements. Focus on setting stop-loss and take-profit levels in advance and strictly executing them.

Step 7: Develop and Execute Your Trading Strategy
Make trading decisions based on fundamental analysis (economic data, policy changes) or technical analysis (candlestick patterns, indicator signals).

Going Long vs Going Short: An In-Depth Look at Two Trading Directions

Long Strategy: Expect Price Rise

Investors buy the corresponding futures contract if they believe an asset’s price will increase.

Example: Expect crude oil prices to rise, buy CME E-mini crude oil futures. If oil prices indeed go up, the contract’s value increases, and selling it yields profit.

Expect a rebound in US stocks? Buy CME S&P 500 E-mini futures. If the S&P 500 rises, selling later earns a profit.

Short Strategy: Expect Price Drop

Investors sell futures contracts if they believe an asset’s price will decline. They can then buy back (close the position) at a lower price, pocketting the difference.

Example: Predict weak demand for crude oil and a sharp price drop, sell CME E-mini crude oil futures. After the price falls, buy back at a lower price to earn the difference.

Anticipate a continued decline in US stocks? Sell CME Dow E-mini futures. If the market drops as expected, closing the position yields profit.

This ability to trade both directions is a major advantage of futures compared to stocks.

Why Is Futures Trading Risky? Four Major Pitfalls You Must Know

1. Leverage Is a Double-Edged Sword
Leverage amplifies both gains and losses. For example, controlling a futures contract with 5% margin means a 1% price move can result in a 20-fold change in your capital. Traders lacking discipline can easily face margin calls or liquidation after a few losses.

2. Unlimited Loss Risk
While the worst case for stocks is losing your invested capital, futures can entail unlimited losses. Since only a margin is paid, but the contract value can be 20 times the margin, in extreme cases, investors may owe money to the broker. Many investors have faced margin calls due to not cutting losses timely.

3. Contracts Have Expiration Dates
Futures must be settled or rolled over before expiration. Ignoring the expiration date can force you to close positions at unfavorable prices, increasing costs.

4. High Professional Threshold
Futures trading demands much higher knowledge and psychological strength than stocks. Most participants are professional institutions; retail traders unprepared are at a disadvantage.

Core Advantages of Futures

Advantage 1: High Capital Efficiency
Use a small amount of margin to control large positions, attractive for investors with limited funds but bullish outlooks.

Advantage 2: Long and Short Both Possible
Shorting stocks requires borrowing, paying fees, and facing additional costs. Futures make short and long positions equally easy, with a symmetric trading mechanism.

Advantage 3: Hedging Tool
Suppose you hold Apple stocks but worry about a market downturn. You can short S&P 500 futures to hedge. When the market falls, futures profit offset stock losses. When the market rises, although futures may lose, as long as Apple’s gains exceed the market’s decline, your overall position profits. This is especially useful before holidays or major announcements.

Advantage 4: Sufficient Liquidity
Global futures markets have many participants, large trading volumes, low bid-ask spreads, and are suitable for large funds seeking high-throughput assets.

Contracts for Difference (CFD): A More Flexible Derivative Tool

What is a CFD?
A Contract For Difference (CFD) is a derivative where the buyer and seller agree to settle the difference in the price of an asset without physical delivery. The contract tracks the spot price, and only the price difference is settled.

Futures vs CFD: Which Is Better?

CFDs’ advantage lies in no expiration constraints, allowing indefinite holding without rollover concerns. Leverage can be freely adjusted, and trading sizes are more flexible, lowering entry barriers.

Key Points for CFD Trading:

• Control Leverage Ratio
  Different assets have different volatility. Forex generally has smaller fluctuations, so higher leverage is feasible; stocks and commodities are more volatile, so lower leverage is recommended to protect capital.

• Develop a Complete Trading Plan
  Include entry conditions, stop-loss and take-profit levels, and risk per trade. A trading plan is not optional but the foundation of survival.

Common Mistakes in Futures Trading

• No Stop-Loss Awareness: Trading full size without stop-loss can wipe out your entire capital in a single volatile move.
• Over-Leverage: Using maximum leverage to chase quick gains often results in being hit by small reversals.
• Ignoring Liquidity: Trading illiquid assets leads to large spreads and high costs, eating into profits.
• Emotional Trading: Doubling down after losses, leading to deeper losses.
• Lack of Fundamental Research: Entering trades blindly without understanding the reasons behind the move.

Summary: Who Is Suitable for Futures?

Futures are not suitable for all investors. If you have sufficient idle funds, comprehensive trading knowledge, strong psychological resilience, and strict risk management discipline, futures can be a powerful tool to enhance returns or hedge risks.

However, for beginners, it’s recommended to start with demo trading, spend enough time and virtual funds to understand the mechanism, master stop-loss discipline, and only then consider real trading. Futures are amplifiers—they magnify your correct decisions but also your mistakes.