Learn How to Spread Trade

Spread trading is another investment strategy used by traders. This trading is a mixture of both spread betting and day trading. Many financial markets on the exchange are available to spread trade.

Spread trading involves trading on two bets at the same time. The spread trades can be on the same commodities in an exchange. However, different contract months or different exchanges can be used.

Spread trading involves going long on one bet and short on another. Therefore, one bet may lose and the other may come in as a profit. In this situation, hopefully the profits are great than the losses.

An Example of a Spread Trade

Spread trading is not complicated but examples can help one learn. Specific trading examples demonstrate spreads and wagers clearly. Forex markets are one of the most popular spread trading markets.

A spread trade chooses one currency in a pair, the GBP/USD. This currency pair has a spread of 1.576 - 1.588 offered by a firm. A trader believes the pound will rise over the dollar and buys.

The trader buys for £1 per pip, 0.0001, with an expiration one month. By settlement, the market closes with the pound finishing at 1.601. The point difference 1.601-1.588 is 0.013 is divided by 0.0001.

The result is 130 pips multiplied by the wager, £1, a profit of £130. This is how profits are calculated in spread trading currency. A trader uses this example to evaluate potential losses and profits.

Futures are contracts where one contract is expiring in one month. The other contract is expiring at another time three months later. Futures on corn commodity show a good example of spread trading.

The July corn contract is selling at $2.15 and the December at $2.63. The difference in the two contract prices for the months is $0.46. A buy bet is placed on July corn and a sell bet on December.

This means the trader believes the July contract to increase. However, the July contract falls to $2.05, a loss of $10 has accrued. The December contract rises to $2.83 and results in a profit of $20.

In this futures contract bet the trader netted a profit on the trade. The net profit is $10.00 which is the difference between the two bets.

Facts of Spread Trading

In this trading, traders do not make money on the market direction. Instead, profits are on the difference in price of the two markets.

In spread trading, a trader should learn to take advantage prices. Traders can take advantage of different prices in the exchanges. Seasonality of commodities should also be taken into consideration.

The cost of a commodity with a later expiry tends to be higher. The price is typically higher than the price at harvest time. The reason is the commodity is being harvested and supply is high.

Learning how to spread trade will take time for any trader. It is one of the more complicated types of investing to learn. A good spread trading firm can help a trader become successful.

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