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The Spread Trading Strategy

Spread trading strategies involve the simultaneous sale of a specific security and sale of a related security. This can be done online with established online brokerages like eToro (Tip: A website called Wikitoro.org discusses about eToro spreads and other related topics. If you’re interested to know more, you check click on this link: https://www.wikitoro.org/etoro-spreads).  Both securities form the “legs” of the trade. The objective of spread trading is to profit from the difference of the two sales. Typically, the trade is completed in a synchronized manner, and is executed as a single unit.

In spread trading, a trader places Buy and Sell positions on a related asset. It is not encouraged that two options are placed on a single asset, unless you are using two different trading brokers. The basic idea for spread trading is to find two assets with one Up trend line, and another a Down trend line. A Buy spread is placed on the asset that the trend line is Up, and a Sell trade is placed on the asset where the trend line is Down. Both trades are placed at the same time.

Any changes in market conditions will tend to affect both legs. However, volatility for both is significantly reduced as compared to the effect of volatility on the two legs when considered individually.

There are three common types of the spread trading: Calendar Spreads, Inter-Commodity Spreads and Option Spreads.

  • Calendar Spreads- trades that differ only in the delivery date. E.g. Coffee Futures in November and Coffee Futures in December.
  • Inter-Commodity Spread- focuses on the economic relationship between two unlike but of equivalent value commodities. E.g. Gold and silver.
  • Option Spread- involves buying and selling the same stock at varying strike points.

A trader needs to evaluate some key factors before deciding to make use of the spread trading options. Here are some of the notable advantages and challenges of the strategy:

Advantages

  • Good for beginners as there is less price volatility and prices move less quickly
  • Lower margin rates on spreads in commodity futures
  • Hedging opportunities

Challenges

  • Less liquid than other trades
  • Much higher transaction costs incurred
  • Limited profit potential

The use of Spread Trading helps reduce exposure to sudden price changes. The use of price spread analysis techniques enables investors to calculate exposure to price volatility in different market assets.

Spread Betting

Spread betting is designed to create a balance on the outcome of a trade. It is a much safer way to trade as investors are the one who decides on the amount to trade, as well as the risk involved for the whole trade duration. As there is the probability of the market changing unexpectedly, trading in high amounts could prove to be risky. Work with spread orders by setting a price limit.

Analyzing Data Matters

Newbies can greatly benefit from techniques in analyzing data for spread trading. They are able to point out sensible strike prices and settlement dates. And this information can be instrumental in reducing exposure to sudden price changes.

It can be noted though that reputable brokers are extremely helpful when it comes to spread trading. Novice traders are able to use trading tools from these brokers, which is helpful in the price comparison of most assets traded on a global scale.

In addition, here are several tips on how you can make the most from the benefits of spread trading:

  1. Take an online course about spread trading. There are plenty of materials online that can help you get started. You can also use demo accounts to practice spread trading before you start investing with real money.
  2. Take a thorough look on which asset to invest in, and on the implication of spread betting on these assets.
  3. Have your own strategy when you apply spread trading. Customize the way you trade to better maximize the outcome for profits.

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