“I’ve heard that trading futures can make you rich quickly, but the risks are also very high.” “What are futures? They seem different from stocks.” Are these the questions on your mind? Don’t worry. Today, let me, a seasoned veteran of the market, explain the mysteries of futures in the most down-to-earth way. Many people find futures complicated and intimidating, but once you understand the core logic, you’ll find it to be a powerful financial tool. This complete futures trading tutorial will start from the basic concept of a futures contract, so you’ll no longer be a market novice.
Simply put, futures are like “pre-ordering” future goods. Imagine you’re a coffee shop owner, worried that the price of coffee beans will soar in three months, affecting your costs. You can use the futures market to “pre-agree” with a seller to buy a batch of coffee beans three months later at today’s price. This way, no matter how much the market price skyrockets in three months, your procurement cost is locked in. This is the most original and important function of futures—Hedging.
Of course, the market isn’t just for people who want to hedge. There’s another group of people who neither produce nor need coffee beans, but they predict that coffee bean prices will rise in the future. So, they buy coffee bean futures contracts, wait for the price to go up, and then sell them to earn the price difference. We call this group Speculators. It is these two forces that create the active and fascinating futures market.
💡 Core Concept: A future is a “Standardized Contract”
Remember, you are not trading a physical commodity, but a “contract.” This contract specifies the purchase or sale of a specific quantity and quality of a commodity at a predetermined price at a specific time in the future. Because it’s “standardized,” everyone can easily buy and sell them on public exchanges like the CME Group or the Taiwan Futures Exchange (TAIFEX).
Now that you understand the basic concept, let’s break down the core mechanisms of how futures work. Understanding these parts will put your knowledge of “what are futures” ahead of 80% of beginners.
Every futures contract is like a rigorous legal document, clearly defining the following four keys:
Let’s use the familiar “TAIFEX Futures” as an example:
| Item | Details |
| Exchange | Taiwan Futures Exchange (TAIFEX) |
| Underlying Asset | Taiwan Stock Exchange Weighted Index (TAIEX) |
| Contract Size | Index Value multiplied by NT$200 |
| Tick Size | 1 index point (Tick) = NT$200 |
| Delivery Month | The three consecutive months starting from the trading month, plus the next three quarter months (March, June, September, and December). |
From the table above, you can clearly see that for trading one “Large TAIFEX” contract, every 1-point move in the index changes your account value by NT$200. This is the power of a standardized contract, providing a common trading basis for all market participants.
This is definitely the most fascinating and riskiest part of futures. To trade futures, you do not need the full value of the contract. You only need to deposit a sum of money as a “security deposit” or “good faith deposit,” which is called Margin.
It’s like using a $100,000 down payment to reserve a $10 million house. You use a small amount of capital to control a high-value asset, and this is Leverage.
Risk Warning: Leverage is a double-edged sword! It can amplify your profits, but it can also amplify your losses just as much. A 10% market fluctuation, with 10x leverage, could mean a 100% loss of your principal. Therefore, understanding and controlling leverage is a matter of life and death in futures trading.
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Many people think futures are only about indices or oil, but the world of futures is much broader than you imagine. Basically, any commodity with a public quotation, price volatility, and a large number of buyers and sellers can have a corresponding futures contract. We can roughly divide them into two major categories:
This is the oldest type of futures and is closely related to our daily lives. It mainly covers:
Trading commodity futures allows you to participate in the price fluctuations of these raw materials without actually buying a barrel of oil or a warehouse of soybeans.
This is a more rapidly developing market in modern times, where the underlying assets are not physical commodities but various financial assets or data.
Before you invest real money, you must objectively look at both sides of futures. It is both a potential gateway to wealth and a trap that can leave you bruised and battered. Let’s use a table to clearly compare the advantages and disadvantages of what are forex futures and other futures:
| Pros | Cons |
|
High Leverage, High Efficiency Control large-value contracts with a small margin, high capital utilization. |
High Leverage, High Risk Losses are also magnified by leverage, which can lead to rapid loss of principal or even debt. |
|
Powerful Hedging Tool Businesses or portfolios can lock in costs or profits to hedge against market uncertainty. |
Forced Liquidation Risk When account funds fall below the maintenance margin and are not replenished in time, positions will be forcibly sold. |
|
Flexible Long/Short Trading Whether the market goes up or down, there are opportunities to profit (going long or short) if you predict the direction correctly. |
Expiration Date Limitation Contracts have expiration dates and cannot be held long-term like stocks; they require rolling over. |
| High Transparency
Traded on centralized exchanges, prices are public and transparent, with good liquidity. |
High Market Volatility Futures prices are affected by global political and economic events and can experience sharp fluctuations in a short period. |
| Future Price Discovery
Futures prices reflect the market’s collective expectation of future supply and demand, serving as an important economic indicator. |
High Psychological Demand Leveraged trading amplifies greed and fear, requiring extremely high discipline and emotional control. |
Now that you understand the theory, are you ready to test the waters? Hold on! Follow these steps to build a solid foundation for a long journey. This is a recommended futures account opening process for beginners.
Step 1: Study Diligently and Build Your Knowledge Base
Before opening an account, make sure you understand the rules of the game. Read books, watch online courses, and follow financial news. The deeper your understanding of “what are futures,” the higher your survival rate will be. This is the most important but most easily overlooked step.
Step 2: Choose a Reliable Futures Broker
Your broker is your partner on the battlefield, so it’s crucial. Key considerations include:
Further Reading: How to Choose the Best Forex and Futures Broker?
Step 3: Open a Futures Account and Practice with a Demo Account
Prepare your identification documents and follow the broker’s instructions to open an account online or in person. After opening the account, it is strongly recommended that you practice with a “demo account” first! Familiarize yourself with the order process, test your trading strategies, and feel the market’s pulse without using real money.
Step 4: Develop Your Trading Plan
Never enter the market without a plan! Your plan should include:
Step 5: Deposit Margin and Start Live Trading
When you can consistently make profits in demo trading and are confident in your trading plan, you can deposit margin and make your first real trade. Remember, start with “small contracts” and “small positions” to gradually accumulate experience.
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When discussing foreign exchange hedging, you often hear about “Forex Futures” and “Forex Forwards.” Although their purpose is similar, their operations are vastly different, and they are suitable for different parties.
| Characteristic | Forex Futures | Forex Forwards |
| Trading Venue | Centralized Exchange (e.g., CME) | Over-the-Counter (OTC), Interbank Market |
| Contract Specifications | Standardized (amount, expiration date fixed) | Customized (can be tailored to needs) |
| Liquidity | High, easy to buy and sell | Lower, not easy to terminate early |
| Counterparty Risk | Extremely low (guaranteed by the clearing house) | Exists (depends on the creditworthiness of the bank you are dealing with) |
| Margin | Required, daily settlement (Mark-to-Market) | Usually not required, or only a small credit line is needed |
| Suitable For | General investors, speculators, small businesses | Large import/export enterprises, multinational corporations, financial institutions |
In summary, Forex Futures are like standard-sized ready-to-wear clothes. Although the sizes are fixed, they are readily available and easy to resell, making them suitable for most people. Forex Forwards are like high-end custom-tailored suits. They are made to your exact specifications, but the production cycle is long, and changes cannot be easily made, making them suitable for corporate clients with specific large-scale needs.
After today’s in-depth guide, I believe you now have a clear and comprehensive understanding of “what are futures.” Futures themselves are neutral; they can be a protective umbrella for a stable business or a sharp weapon for investors seeking excess returns. Their power comes from leverage, and so do their risks.
The key to mastering futures is not to predict every rise and fall of the market, but to establish your own tested trading system and risk management discipline. Before you truly understand the rules of the game and learn to protect your principal, please maintain a sense of reverence. Start with learning, supplement with simulation, and trade with a plan—this is the only path to success.
I hope this guide can be a solid cornerstone for you as you step into the world of futures. I wish you steady and long-term success on your investment journey!
No! This is one of the biggest myths for beginners. The vast majority (over 98%) of futures contracts are settled before expiration through an “offsetting transaction” to realize profits or losses. For example, if you buy a June gold futures contract, you can “sell” an identical contract on any trading day before expiration to close your position. Only a very small number of traders with a need for the physical commodity will take physical delivery.
This depends on the commodity you are trading and the required “initial margin.” The margin for different commodities varies greatly. For example, the margin for trading one “Mini-TAIEX Futures (MTX)” contract is about NT$40,000, while the margin for one “Light Crude Oil” contract could be several thousand US dollars. It is recommended to check the latest margin requirements on the official futures exchange website before trading.
“TAIFEX Futures” is the abbreviation for “Taiwan Stock Exchange Weighted Index Futures,” issued by the Taiwan Futures Exchange (TAIFEX), and it is the most popular futures product in Taiwan. Its underlying asset is the “Taiwan Stock Exchange Weighted Index,” which is what we commonly refer to as the “TSE index.” Trading TAIFEX Futures is equivalent to predicting the future direction of the entire Taiwan stock market, making it an important indicator of Taiwan’s stock market sentiment.
Yes, it is possible. This is called a “debit balance” or “excess loss.” Although the probability is low, if the market experiences extreme and discontinuous price gaps (e.g., major negative news over the weekend causing the market to open at its lower limit on Monday), your losses could exceed all the margin in your account. If the broker is unable to liquidate your position in time, you will be required to cover the losses that exceed your principal. This is why risk control is so important.
There are three main differences: 1. Ownership: Buying stock makes you a shareholder, owning a part of the company; buying futures is buying a “contract” and does not confer ownership of the physical asset. 2. Trading Direction: Stocks are usually profitable only by going long (buy low, sell high); futures allow for flexible long or short positions (sell high, buy low). 3. Lifecycle: Stocks can be held for the long term; futures contracts have an expiration date and must be rolled over or closed out.
