ACADEMY / Markets and trading sessions

Futures trading basics: contracts, leverage and testing rules first

A futures contract is a standardized agreement to buy or sell an underlying, such as a stock index, at a set price on a later date, with a fixed expiry, tick size and point value: one ES contract is worth $50 per point, so a 4-point move is $200 before costs. Margin makes every point count. Write your idea as exact entry and exit rules and backtest them with costs before you use real money.

By Soren Huang · Published 2026-10-26 · updated 2026-10-31 · Editorial policy

Contents

What is a futures contract?

A futures contract is a standardized agreement to buy or sell an underlying asset, such as a stock index, at a set price on a future date. Each contract has an expiry, a tick size and a point value. To test an idea before risking money, write it as exact entry and exit rules and backtest them with costs.

A pre-order works in a similar way. You agree on a price today for something that is settled later. With futures, you rarely wait for the settlement date. Most traders close the position earlier by making the opposite trade. The profit or loss is the difference between the two prices.

The exchange fixes every detail of the contract, so every buyer and seller trades exactly the same thing. You need to know these parts before you trade or test anything:

Part	What it means	Why it matters in a test
Underlying	The asset the price follows, for example the TAIEX or the S&P 500 index.	It decides which price history you test on.
Expiry	The date the contract ends and is settled.	Old contracts stop trading, so long tests must join several contracts together.
Tick size	The smallest price step the contract can move.	Stops, targets and slippage are measured in ticks.
Point value	The money that one full point of price movement is worth for one contract.	It turns price moves into money.
Settlement	Cash or delivery of the asset at expiry. The index futures in this article settle in cash.	You never receive shares. Only the price difference is paid.

Buying a contract is called going long. You gain if the price rises. Selling a contract you do not own is called going short. You gain if the price falls. In futures, selling first is as normal as buying first.

How do tick size and point value turn price moves into money?

To find the money value of any move, multiply the points moved by the point value and the number of contracts. The futures contract calculator does this for a real trade. Here is the formula once, in words:

Profit or loss = points moved × point value × number of contracts

"Points moved" is the exit price minus the entry price for a long trade. For a short trade, it is the entry price minus the exit price. "Point value" is the money per point for one contract. The result is before costs. Commission, fees and slippage come off afterwards.

Tick value is the tick size multiplied by the point value. It tells you what the smallest possible price step is worth in money.

Hypothetical example

You buy one E-mini S&P 500 (ES) contract at 5,000.00 and sell it at 5,004.00. That is 4 points, or 16 ticks of 0.25. The result is 4 × $50 × 1 = $200 before costs. The same move on one Micro E-mini S&P 500 (MES) contract is 4 × $5 × 1 = $20.

Which index futures do traders start with?

A mini or micro index contract is a practical place to start. It follows the same price chart as the full-size contract, but each point costs less money.

Contract	Exchange	Underlying	Point value	Tick size	Tick value
TAIEX Futures (TX, 台指期)	TAIFEX	TAIEX	NT$200	1 point	NT$200
Mini-TAIEX Futures (MTX)	TAIFEX	TAIEX	NT$50	1 point	NT$50
Micro-TAIEX Futures (TMF)	TAIFEX	TAIEX	NT$10	1 point	NT$10
E-mini S&P 500 (ES)	CME	S&P 500	$50	0.25 point	$12.50
Micro E-mini S&P 500 (MES)	CME	S&P 500	$5	0.25 point	$1.25
E-mini Nasdaq-100 (NQ)	CME	Nasdaq-100	$20	0.25 point	$5.00
Micro E-mini Nasdaq-100 (MNQ)	CME	Nasdaq-100	$2	0.25 point	$0.50

A Mini-TAIEX contract is one quarter of a TAIEX contract. A Micro-TAIEX contract is one twentieth. The CME micro contracts are one tenth of their E-mini versions. Exchanges can change contract specifications, so check the exchange's contract page before you trade or test.

Expiry works differently on each exchange. TAIEX futures have monthly contracts, and the last trading day is the third Wednesday of the contract month. ES and NQ have quarterly contracts in March, June, September and December, with final settlement on the third Friday of the contract month. A long backtest therefore uses a continuous contract. A continuous contract is a price series that joins each expiring contract to the next one, so the history has no breaks. For more on contract settings for the US indexes, see ES and NQ futures backtesting: five things to set first.

How do margin and leverage make small moves large?

Margin lets you control a large contract value with a small deposit, so a small move in the index becomes a large change in your account. Margin is the deposit the exchange and your broker require for each open contract. It is not a price you pay. It is collateral, and the exchange sets it and changes it over time.

There are two levels. Initial margin is the amount you need to open a position. Maintenance margin is the lower amount your account must stay above while the position is open. If losses take you below it, the broker asks you to add money. This is called a margin call. If you do not add money, the broker can close your position.

Leverage is the ratio between the full value of the contract and the margin you put up. The TAIEX futures margin calculator shows the current margin per contract for TAIEX, Mini-TAIEX and Micro-TAIEX futures.

Hypothetical example

The TAIEX stands at 20,000 points. One TAIEX futures contract is then worth 20,000 × NT$200 = NT$4 million. Assume a margin of NT$300,000 (an invented figure for this example). The leverage is about 13 times. A 1% move is 200 points, or 200 × NT$200 = NT$40,000. That is about 13% of the margin. A 3% move against you costs NT$120,000, or 40% of the margin. The same 200-point move on one Micro-TAIEX contract is 200 × NT$10 = NT$2,000.

Hypothetical example: a 1% move in the index becomes a change of about 13% of the margin on one TAIEX futures contract.

How do you buy and sell a futures contract?

You trade futures through a broker in a few fixed steps, and you leave the trade by making the opposite trade.

Open a futures account with a broker and deposit enough money to cover margin and possible losses.
Choose the contract and the month. The nearest contract month usually has the most trading.
Buy to go long or sell to go short.
Choose the order type. A market order fills right away at the best price available. A limit order fills only at your price or better. A stop order becomes a market order when the price reaches your level.
Close the position with the opposite trade, or let it reach final settlement. An index future is then settled in cash.

Trading hours matter for testing too. TAIEX futures have a regular session from 08:45 to 13:45 Taiwan time and an after-hours session from 15:00 to 05:00 the next day. A backtest must decide whether it uses day bars only or both sessions, because the night bars behave differently.

Why test an idea on historical data before risking money?

A backtest lets you find the weak points of an idea with no money at risk. A backtest is a simulation that applies fixed rules to historical prices and records the trades those rules would have made. It shows how often the rules trade, how large the losing periods were, and whether anything is left after costs.

A backtest cannot tell you what the future will bring. It measures how the rules fit the past. If you try many versions of an idea on the same data and keep the best one, part of that result is luck. Think of an archer who shoots first and then draws the target around the arrow. Bailey, Borwein, López de Prado and Zhu (2014) show that when many variants are tested on the same history, an impressive backtest becomes easy to find by chance and says little about results on new data. Harvey and Liu (2015) make a similar point: the more strategies you test, the higher the bar a result must clear before it means something.

How do you turn a trading idea into testable entry and exit rules?

An idea becomes testable when every decision is written so precisely that a computer would reach the same answer as you. Most first ideas are feelings, not rules. The fix is to replace each vague phrase with a number and a time.

Vague idea	Testable rule
Buy when the market is strong.	Buy at the next bar's open when a bar closes above the highest high of the previous 20 bars.
Get out if it goes wrong.	Exit with a stop 40 points below the entry price.
Take profit when it is enough.	Exit at 80 points profit, or at the last bar of the day session.
Trade the active hours.	Enter only between 09:00 and 13:00 Taiwan time.
Trade small.	One Micro-TAIEX contract per signal.

Then follow the same order every time:

Write the idea in one sentence with its reason. For example, "After the TAIEX breaks its first half hour range, the move often continues."
Fix the market and the data: the contract, the bar size and the session.
Define the entry exactly, including the time window.
Define every exit: a stop, a target and a time exit, so no trade stays open by accident.
Set costs for every round trip: commission, exchange fees, the futures transaction tax in Taiwan, and slippage. Slippage is the gap between the price the test assumes and the price you would really get. See trading costs in backtests for how to estimate it.
Execute on the next bar. A rule that decides on a bar's close cannot also fill at that same close.
Test on the earlier part of the history and keep the later part unseen until the rules are final.

From idea to decision: the rules and costs are fixed before the test, and the unseen part of the history decides.

Hypothetical example

The rules above are tested on one Micro-TAIEX contract with 5-minute bars, day session only. Assume a round-trip cost of 4 points. The test shows 200 trades. The average trade is 6 points before costs and 2 points after costs, which is NT$20 per trade. The edge is only half the size of the cost. If slippage were one tick worse on each side, the average trade would fall to zero. These rules need a larger edge per trade before they deserve more work.

When you read the first result, compare a few signs side by side. One of them is the largest drawdown. A drawdown is the drop in account value from a previous peak to the lowest point before a new peak. The drawdown column in the performance report of AlphaPrime (Valynox) sits beside equity and the trades, so that first result can be read as a whole before you change a rule.

What to check	Encouraging sign	Weak sign
Number of trades	Enough trades to judge the rules	A handful of trades
Average trade after costs	Several times the round-trip cost	Close to zero
Largest drawdown	A loss you could sit through	A loss larger than you would accept
Unseen later history	Results in the same direction	The result disappears
Small changes to the numbers	Similar results	The result collapses

AlphaPrime works with your own historical bar data for TAIEX futures and other futures markets. Its strategy generation turns research ideas into testable rules with entry and exit conditions, parameter ranges and search constraints. Its backtesting evaluates every candidate with the same settings for data resolution, fees and slippage, and trading sessions, always using next-bar execution.

What this means if you use AlphaPrime: you describe the contract, session, costs and rule ranges once, and AlphaPrime tests every rule set under those same conditions. Your job is to judge the results against the unseen history and decide which ideas deserve more work.

Frequently asked questions

What does futures mean in simple terms?

A futures contract is an agreement to buy or sell something at a set price on a future date, with all details fixed by the exchange. For index futures, nobody delivers shares. Traders gain or lose the price difference in cash, multiplied by the contract's point value.

What is the difference between TAIEX, Mini-TAIEX and Micro-TAIEX futures?

All three follow the same TAIEX price, so their charts look the same. The difference is the money per point: NT$200 for TAIEX futures, NT$50 for Mini-TAIEX and NT$10 for Micro-TAIEX. A smaller point value means smaller gains, smaller losses and a smaller margin per contract.

Can you lose more than your margin in futures?

Yes. Margin is a deposit, not a limit on losses. In a fast move, or when the market opens far from the last price, the loss can exceed the money in the account. You then owe the difference to the broker.

Does a profitable backtest mean a strategy will make money?

No. A backtest shows how fixed rules would have traded on past prices, and the past may not repeat. A result that holds up after costs and on history that was kept unseen is more useful than one strong test. It is still not a forecast.

How much does one point of ES or NQ futures move my account?

One point of ES is worth $50 per contract, and one point of NQ is worth $20 per contract. The micro versions, MES and MNQ, are worth $5 and $2 per point. The smallest price step for all four is 0.25 point.

References

Bailey, D. H., Borwein, J., López de Prado, M., & Zhu, Q. J. (2014). Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance. Notices of the American Mathematical Society, 61(5), 458–471.
Harvey, C. R., & Liu, Y. (2015). Backtesting. The Journal of Portfolio Management, 42(1), 13–28.