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.

The potential to make money in spread trading is present as with any type of stock investment strategy. The key to making profits is to have a full understanding of how spread trading works so one can execute successful trades. To make money in spread trading, a trader should have certain strategies in place.

Spread trading involves betting on two positions in the market at the same time. A go long and a go short position will be in effect with a wager for each. Unless this is a futures contract, the actual market price can’t go up and down; one of these positions is a loss whilst one is a profit. It is the hope that the profits offset the losses. In some cases this does happen, but in others the profits end up minimising the losses.

The key to spread trading successfully is to have the skill to identify which spread has the probability to be the winner. It is also important to know how much to wager for each spread. This can make the difference between small and large profits, as well as small and large losses.

One spread which shows good profits is a spread on a futures contract with a 100 dollar wager on the go long and the short position with a spread difference of 0.20. At the time of the closing bet, the spread difference was 0.10 multiplied by the wager is a 100 dollar profit. With a 10 dollar wager, the profit would only have been 10 dollars. This is a case which demonstrates in order to make good profits one must risk substantially more.

In spread trading, there are two bets with the assumption that at least one will come in, but this isn’t always the case. Sometimes, both bets can come in especially on a futures contract. Great profits can be made when both bets close in the trader’s favour. This is the ideal situation in spread trading and certainly it has the potential to happen. It does take a great deal of knowledge about the market’s current prices and historical trends, but this can all be learned.

Spread trading has the potential to make good profits for the trader if the trader uses a certain skill set. Making strong wagers on lower risk bets and cutting losses when necessary are important in making good profits. The likelihood of making huge profits rather quickly is small, but strong solid profits can accrue to large good profits in spread trading.

To be successful at spread trading, a trader must have software that is also successful. Since spread trading is so complex and requires a trader to have a vast amount of knowledge, it is imperative to use software to analyse trades. With market prices moving so quickly, a trader doesn’t have time to perform technical analysis of all the markets in order to spread trade. Software can do this much more quickly and efficiently.

Choosing the best spread trading software isn’t very difficult. There are key features in spread trading software that one should look for. It should obviously have an automated spread trading model which distinguishes the price difference between pairs of a security. These securities are indices, futures, options, commodities, and stocks.

A spread trading system should include three main indicators. These are exponential moving averages, Percentage Price Oscillator, and Donchian Channels. The exponential moving averages are important because these will give an average of market moving prices in relation to how long the prices took to move. This is an important part of technical analysis since these averages are used in conjunction with other tools to determine market trends.

A percentage price oscillator (PPO) is a momentum indicator which measures and shows the relationship between two moving averages. The PPO and the exponential moving averages are used in combination in technical analysis of trading markets. The software is programmed to compute these instead of wasting precious time by having the trader complete this calculation.

The last indicator a system should have is the Donchian Channels. This is an indicator which plots the highest and lowest price over a period of intervals. Using this, the system will generate signals based on where the actual market prices are in relation to the Donchian Channels.

A good spread trading software should have these three indicators as these have been proven to be part of successful spread trading software. Other components that may enhance particular spread trading software are the benefits associated with the software. Software tutorials, easy to read guides, and downloadable online data are other benefits.

Depending on one’s level of technical and computer knowledge, the ability to create spread trading software is available. These systems come with PDF guides on how to create the system in MS Excel and may be a possibility for certain traders. The benefit of creating your own spread trading software is that it is unique to your trading needs.

Whether one decides to create a system or download a spread trading system, the best spread trading software must have the mentioned key components. Spread trading software that can’t analyse the market correctly is useless.