Futures Trading Guide: How to Trade Futures and Manage Risks

Introduction to Futures Trading

Investing in the stock market is often the first step for beginners, but many soon encounter the term "futures." What exactly are futures? Are they high-risk? While some caution against futures trading, others have built fortunes with it. This guide will walk you through futures trading—from opening an account to practical examples—helping you understand how to trade futures effectively.

The Origins of Futures

How Did Futures Develop?

From hunting-gathering to agriculture, humans faced unpredictable harvests due to droughts, floods, or pests, causing price fluctuations. Ancient governments stockpiled grains to stabilize prices, but Western societies relied on contracts—agreements to buy/sell crops at fixed future prices. This concept evolved into modern futures trading.

Key Features of Early Futures:

• Leverage: Small margin deposits control larger positions.
• Flexibility: Ability to go long or short.
• Risk: Amplified gains/losses require caution.

What Are Futures? How Do They Work?

Futures (Futures Contracts) are standardized derivatives traded on exchanges, specifying:

• Underlying asset (commodities, indices, currencies, etc.).
• Contract size, price, expiration date.
• Settlement method (cash or physical delivery).

Example: Taiwan Futures Exchange (TAIFEX)

Most traders focus on the Taiwan Stock Index Futures, tracking the weighted index of Taiwanese stocks.

Futures Contract Components:

How to Trade Futures: 9-Step Process

1. Learn Market Basics

Understand leverage, expiration, and long/short strategies.

2. Choose a Trading Style

Decide between short-term speculation or long-term hedging.

3. Select a Futures Broker

Compare brokers for fees, platform quality, and asset variety:

👉 Compare top futures brokers

4. Practice with a Demo Account

Use platforms like Mitrade’s $50,000 demo to test strategies risk-free.

5. Pick Your Futures Contract

Popular categories include:

6. Fund Your Account

Margin requirements vary (e.g., TAIFEX’s FITX requires NT$184,000).

7. Analyze Market Signals

Use technical/fundamental analysis to time entries.

8. Execute Trades

• Long: Buy if prices are expected to rise (e.g., crude oil futures).
• Short: Sell if prices may fall (e.g., shorting S&P 500 futures).

9. Set Stop-Loss/Take-Profit

Limit risks by predefining exit points. For beginners, tighter stops and smaller positions are advised.

Pros and Cons of Futures Trading

Advantages:

✅ Leverage: Amplify returns with smaller capital.
✅ Flexibility: Trade long/short without restrictions.
✅ Hedging: Protect portfolios against price swings.
✅ Liquidity: High trading volume ensures easy entry/exit.

Risks:

⚠️ Leverage Dangers: Losses can exceed initial margin.
⚠️ Unlimited Liability: Extreme volatility may lead to debt.
⚠️ Complexity: Higher skill threshold than stocks.
⚠️ Fixed Contracts: Less flexibility in position sizing.

CFDs: A Flexible Alternative to Futures

Contract for Difference (CFD) derivatives offer:

• No expiration dates (hold indefinitely).
• Smaller contract sizes (e.g., 0.01 lots).
• Wider asset range (400+ markets on Mitrade).

CFD Trading Tips:

1. Adjust Leverage: Lower leverage for volatile assets.
2. Plan Trades: Define stop-loss/profit targets strictly.

👉 Explore CFD trading strategies

FAQs

1. How do futures differ from spot trading?

Futures use leverage, have expiry dates, and lack dividends. Spot trading involves immediate asset delivery.

2. How to short futures?

Simply sell a futures contract (no borrowing required). Always set stop-loss orders.

Final Notes

Futures and CFDs carry high risks. Test strategies via demo accounts and consult financial advisors before investing.
Risk Disclosure