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Spread Trading Strategy

It is the dream of every trader to find a strategy, producing consistent profits by escaping great drawdowns, and spread trading may just come close to fulfilling it. Spread trading, that evolved together with market creation and traditionally has been applied to futures, is considered a powerful trading strategy.

Spread trading offers leverage of CFDs and futures, and helps you to reduce risks without having to pay up for time premium, as option traders do. The benefits of spread trading are:

  • a small deposit, against which a broker lends you the amount necessary to conduct a decent trade
  • access to 1000s of markets on one trading platform
  • plus flexible trading hours and commission free trading.

A lot of traders associate spread trading with hedging. Hereby, banks and commercial traders, being well aware of it, use it as their main trading strategy. They make money because they are risk averse and spread trading serves as a more reliable source of profit.

Spread trading is advantageous for both novice traders and experienced ones as it is featured by less volatility, lower margins and smoother trends than in case of outright positions. This helps traders operate under less stressful conditions, learn pattern recognition and develop trading management skills.

Spread Trading - Spread Strategy

There are few simple rules to follow while trading spreads. It is important for a trader to avoid chasing losses. A lot of traders continue investing into a losing trend, expecting that the trend will change or they get back into the trade they’ve previously lost, hoping to get back their losses. Avoid this mistake by being reasonable and not getting into this emotional trap. Invest amounts that one can afford to lose – experience shows that especially beginners always lose more than they can afford to lose. We strongly advise to use stop loss orders to avoid downside risks and monitor used money while trading.

Since the introduction of CFDs, shares have also become possible to be spread traded; this is commonly referred as Pair Trading. The spread strategy requires that a trader should hold a short or long position in the same or closely related markets. CFDs also allow traders to sell a share in a leveraged manner as it is possible with future contract. In both cases the investor is interested only in the price difference between the two contracts, as opposed to the outright price of the underlying futures or shares. So, the essence of spread trading is as simple as buying low and selling high.

In futures you carry less risk, margin and volatility by trading two related contracts that are closer or more similar. An example is a calendar spread which actually has the least amount of risk as here spread includes similar contracts with various expiry dates. In such cases you are more likely to have smoother trends and less stress in managing the position. Consistent pricing allows for precise charting details. Lower risk and volatility that are associated with most spreads are indicated by lower margin requirements. Lower margin not only signifies greater use of your capital but also lets you hold multiple spread positions.

The emotional and psychological impact of losing trade is decreased in spread trading; this increases confidence and improves management of profitable trades.

Due to spreads being long and short, one’s trade is not subjected to the influences of large commercial involvement, as it would be in an outright position. Majority of spreads are not subjected to market manipulation and are not highly concerned with market liquidity and slippage. In most calendar spread trades you can manage your position with the same effectiveness as an outright position by setting different types of orders. Since, one holds identical contracts on each leg there is a more balanced effect when compared to the inter-market spread, which has different fundamental forces affecting each leg. Despite its numerous merits spread trading is not available on all the trading terminals. This becomes a grave problem for traders that are unable to create charts of asset combinations and make an analysis using different technical indicators.

At present due to the innovative portfolio trading method GeWorko traders interested in spread trading strategies can create charts with ease and comfort and consequently make a thorough technical analysis of both simple and complex asset combinations. The method is only available on the trading-analytical platform NetTradex. Creating a chart will take maximum one minute, and this also refers to charts containing any complex PCI with GeWorko method composed of any number of assets in each compared portfolio.