Spread trading is a kind of investment strategy which combines spread betting and trading. Spread trading is similar to spread betting in that a trader is trading on a spread, but the difference is the spread trader is betting two bets at the same time.

In spread trading, a trader is taking a long and short bet of a spread. The trader makes a wager of his determination on the bid price and offer price of a spread. In this way the risk is no longer the fluctuations of price but the difference of the two numbers in the spread.

It may be easier to understand by looking at an example using the commodity wheat. The September contract for wheat is $6.40 and the November contract is $5.40. A trader goes long on the September contract and short on the November contract. The trader sold and bought the same amount of wheat so the difference in the two contracts is $1.00. After two weeks, the September’s contract rises to $6.80 and the November’s contract also rises to $5.50. The trader had predicted the September price to rise but had predicted the November price to fall when in fact it rose.

Now the difference in price is $1.30 and the trader decides to close the bet. So the trader sells back the shares bought in September and buys back the shares bought in November. The original purchase price was a dollar and so the net profit is 30.

Spread trading is understandable, but entails a great deal of knowledge on the trader’s behalf. To spread trade successfully a trader must have knowledge of futures contracts. These are trades with future expiration dates which can be anywhere from one month or more depending on the commodity or forex. Typically, these dates are quarterly.

Spread traders additionally need to understand commodities markets and options markets. These two markets offer great potentials for spread trading, but with rather complex strategies. Trading on the commodities markets can include the same commodity or commodities in two different exchanges. Spread trading on commodities is seasonal so knowing the right time to spread trade on commodities is critical.

There are plenty of benefits to spread trading, such as lower margin requirements and lower risks on spreads. However, spread trading entails a lot of background knowledge about trading and the markets. Some of these elements can be learned through tutorials on spread trading, but the extent and complexity of the knowledge required can only come with experience.