Recently, many people have asked me what futures are and how to participate in futures trading safely. In fact, this is a great question, because many people are both interested in and afraid of futures. They’ve heard stories of people turning things around through futures, and also stories of people losing everything. Today, let’s talk about what futures really are.

Speaking of the origins of futures, it’s actually quite interesting. When humanity shifted from hunting to agricultural production, it faced a major problem—living by the weather. Natural disasters such as droughts, floods, and insect infestations directly affect the harvest. When the harvest is good, agricultural product prices plummet; when the harvest is poor, prices skyrocket. For farmers and merchants, this uncertainty is essentially a nightmare.

Smart people in the West came up with a solution: both sides would sign a contract in advance, agreeing to trade a certain quantity of goods at a specified price at some future time. This allows them to lock in prices ahead of time and mitigate risk. This concept has evolved into what we call futures today.

So what exactly are futures? Simply put, futures are a type of derivative financial contract. The contract specifies details such as the underlying asset, the trading price, and the delivery time. Both the buyer and the seller are obligated to carry out the trade at the agreed price on the agreed date. The underlying asset of futures can be commodities, raw materials, or financial assets such as exchange rates, stocks, and indices. The most frequently traded futures in the world are U.S. large-cap index futures—contracts based on stock indices such as the S&P 500.

A futures contract includes key information such as the commodity code, trading volume specifications, the minimum price fluctuation, trading hours, the expiration delivery date, and whether settlement after expiration is done via physical delivery or cash settlement. These details are set by the exchange, and investors can view them on the futures broker’s website.

The most attractive part of futures is leverage. You only need to pay a margin—usually 5% to 10% of the underlying asset’s value—to control a contract value that is much larger than the margin. This is the so-called “control a big position with a small amount.” But this is also the most dangerous aspect of futures—leverage amplifies both your gains and your losses at the same time. If you misjudge the direction, you might not only lose your entire principal—you could also end up owing money to the broker.

Compared with spot trading, futures have several clear differences. Spot trading involves buying and selling existing physical goods or assets, while futures trading involves trading a contract. Spot trading requires paying the full amount, while futures trading only requires paying a margin. Spot trading has no expiration date, while futures contracts have a clearly defined delivery date. These differences mean that the risks and flexibility of the two investment approaches are completely different.

If you want to participate in futures trading, my advice is as follows. First, you should have a basic understanding of the futures market and grasp the core concepts such as contracts, leverage, and the expiration date. Then you need to decide your trading style—long-term or short-term. Long-term investors are actually not very suitable for using futures as their main tool; they usually use futures more to hedge risk. Short-term traders may be better suited to futures because of their high liquidity.

Next, choose a futures broker to open an account. Futures are issued by major exchanges, such as the CME, NYMEX, COMEX in the United States, the Singapore Exchange, and others. Ordinary investors typically open accounts at the broker’s futures department, and the broker provides an electronic order-trading system. When choosing a futures broker, you should check whether it is safe and reliable, whether its quotes are accurate and fast, and whether its trading fees are reasonable.

Before starting live trading, be sure to practice with a simulated account. Most platforms provide simulated funds, so you can use virtual money first to test whether your trading strategy can truly make money. Don’t skip this step, because the leverage features of futures will magnify every outcome.

There are mainly two ways to play futures. Going long means predicting that the price will rise: you buy the contract first, then sell it later to profit when the price goes up. For example, if you believe the U.S. stock market will rebound, you can buy an S&P 500 futures contract. Going short is the opposite: you predict the price will fall, sell the contract first, then buy it back later to profit when the price drops. This two-way trading flexibility is an advantage that futures have over stocks.

Another very practical use is hedging. For example, if you buy Apple stock but worry about the market falling, you can also go short on S&P 500 futures. If the market really drops, although you’ll suffer losses from the decline in Apple’s stock price, your short position in futures will make money, and the gains and losses on both sides offset each other, reducing overall risk. This tactic is especially useful before long holidays or before important news releases.

When it comes to the advantages of futures, first is leverage trading, which improves capital efficiency. With relatively less capital, you can control a larger contract value. Second, both long and short positions can be taken, unlike stock trading where shorting can be more troublesome. Third, futures have high liquidity. In international futures markets, trading is frequent and the bid-ask spread is small, which is especially friendly for large capital investors.

However, the risks of futures should not be underestimated. Leverage is a double-edged sword—it amplifies both gains and losses. Futures only require you to cover the margin, but the corresponding contract value may be 20 times the margin. If price fluctuations are too large, you may not only lose your entire principal—you could also end up owing the broker money. That’s why strict stop-loss and take-profit strategies must be set before investing in futures, and why you should use a simulated account to fully understand the related risks.

Another issue is that the entry threshold for futures is relatively high. Although the principal required for the margin may not be much, futures are far more professional than stocks, so the main participants are professional investors and institutions. In addition, futures contracts have relatively fixed specifications. They are highly standardized, so the tradable quantity, expiration time, and margin ratio are basically fixed, meaning there is less flexibility than in the spot market.

If you feel futures risk is too high, there’s a compromise option called a Contract for Difference—CFD. CFD combines the advantages of futures and spot trading and is especially suitable for retail investors. It is also traded through contracts, with profit and loss settled based on the difference between buy and sell prices, but it has no expiration date. You don’t have to deliver like futures or settle at a specific time. CFD also has a wider range of tradable products—you can trade over 200 types of assets such as stocks, foreign exchange, and cryptocurrencies.

The biggest advantage of CFDs is their flexibility. The leverage ratio can be adjusted as you like, from 1x up to 200x. The minimum trading size starts from 0.01 lots, so your entry cost is much lower than with futures. Specifications are also more flexible, and in theory, you can hold positions indefinitely without having to deal with rollover.

But CFD risks are similar to those of futures, too—leverage similarly magnifies losses. So whether you trade futures or CFDs, the core points are the same: control the leverage multiple, build a complete trading plan, set stop-loss and take-profit mechanisms, and only then can you create stable returns under controllable risk.

Finally, my advice is: regardless of whether you choose futures or other derivatives, you should first use simulated trading to fully understand the risks, develop a clear trading strategy, and strictly follow your discipline. Futures are not gambling; they are an investment tool that requires professional knowledge and self-discipline. Only by respecting the market and respecting risk can you go further in the futures market.