If you are looking for a trading style that is easy to trade,
has very low margin requirements, and produces up to 10
times more return on margin than your current trading, then you should
definitely learn more about spread trading.
Spread trading is probably the most profitable, yet safest way to
trade futures. If offers many advantages which makes it the perfect
trading instrument for beginners and traders with small accounts
(less than $10,000) and for professional traders who use
spreads to optimize their trading profits.
Hard to believe? Take a look at the following Unleaded Gas Spread:
Example: Long December Unleaded Gas (HUZ)
and Short August Unleaded Gas (HUQ)
Trading this spread you could easily make 933% on your
margin in less than 30 days. Before we show you all the other great
advantages of spread trading, let us answer the basic question first:
What is a spread?
A spread is defined as the sale of one or more futures
contracts and the purchase of one or more offsetting futures contracts.
A spread tracks the difference between the price of whatever it is you are long
and whatever it is you are short. Therefore the risk changes from that of price
fluctuation to that of the difference between the two sides of the spread.
The spreader is a trader who positions himself between the speculator and the
hedger. Rather than take the risk of excessive price fluctuation, he assumes the
risk in the difference between two different trading months of the same futures,
the difference between two related futures contracts in different markets,
between an equity and an index, or between two equities.
For example, a spreader might take the risk of the difference in
price between August Soymeal and December Soymeal (see picture below),
or the difference in price between December Kansas City wheat and December
Chicago wheat, or between the strongest stock in a sector and the weakest stock
in that sector.
Example: Long August Soy Meal (SMQ)
and Short December Soy Meal (SMZ)
A spread trader can just as easily trade the difference
between MICROSOFT and IBM (see below). Or he can trade the difference
between two Exchange Traded Funds.
Example: Long Microsoft (MSFT)
and Short IBM (IBM)
Basically there are 3
different kinds of spreads:
Intramarket Spreads
Officially, Intramarket spreads are created only as calendar spreads. You
arelong and short futures in the same market, but in different months. An
example of an Intramarket spread is that you are Long July Corn and
simultaneously Short December Corn.
Intermarket Spreads
An Intermarket spread can be accomplished by going long futures in one
market, and short futures of the same month in another market. For example:
Short May Wheat and Long May Soybeans.Intermarket spreads can become calendar
spreads by using long and short futures in different markets and in different
months.
Inter-Exchange Spreads
A less commonly known method of creating spreads is via the use of contracts
in similar markets, but on different exchanges. These spreads can be calendar
spreads using different months, or they can be spreads in which the same month
is used. Although the markets are similar, because the contracts occur on
different exchanges they are able to be spread. An example of an Inter-exchange
calendar spread would be simultaneously Long July Chicago Board of Trade (CBOT)
Wheat, and Short an equal amount of May Kansas City Board of Trade (KCBOT)
Wheat. An example of using the same month might be Long December CBOT Wheat and
Short December KCBOT Wheat.
Discover the incredible potential of spread trading
and learn more about all the great advantages
Spreads have low time requirements
You don't have to watch a spread all day long. You do not need
real-time data. These great advantages make spread trading the
perfect trading instrument for professional traders and
beginners.
The most effective way to trade spreads is using end-of-day data. Therefore,
spread trading is the best way to trade profitably even if you do not want to
watch or cannot watch your computer all day long (i.e. because you have a
daytime job).
Even those who daytrade use these advantages to optimize their trading results
at the end of their trading day.
Spreads are easier to trade
Take a look at the Unleaded Gas Spread again (see below).
Do you see how nicely this spread starts trending in the last week of
May? Whether you are a beginner or an experienced trader, whether you
use chart formations or indicators, the existence of a trend is obvious. Spreads
tend to trend much more dramatically than outright futures contracts.
They trend without the interference and noise caused by computerized trading,
scalpers, and market movers.
Spreads have lower margin requirements
Spreads have reduced margin requirements, which means that you can afford
to put on more positions. While the margin on an outright futures
position in Unleaded Gas is $4,750, a spread trade in Unleaded Gas requires
only $405 - 10% as much. That's a great advantage for traders with a
small account. With a $10,000 trading account you can easily enter 4-5
spreads, instead of only 1 outright Unleaded Gas futures trade.
Spreads give a higher return on margin
Each tick in the spread carries the same value ($4.20) as each tick in the
outright futures ($4.20). That means that on a 100 tick favorable move in
unleaded gas futures or a 100 tick favorable move in the spread, you would
earn $420. However, the difference in return on margin is extraordinary:Unleaded gas futures - $420/$4,750 = 9% return on margin
Unleaded gas spread - $420/$405 = 104% return on margin (!!!)And keep in mind that you can trade 10 times as many spread contracts as
you can outright futures contracts. In our example you would achieve a
115 times higher return on you margin.
Spreads give countless trading opportunities
Spreading has gone much further than its original intent. You can spread
one commodity against another (e.g. SMQ-SMZ). You can spread one stock against
another (e.g. MSFT vs. IBM). You can spread one index against another (e.g.
Dow Jones vs. Nasdaq). You can spread the strongest share in a sector against
the sector index. There are dozens of trading opportunities each day,
and you can choose the best ones.
Spreads offer a lower risk
Spreading is one of the most conservative forms of trading. It is much
safer than the trading of outright (naked) futures contracts. Obviously, the
risk taken for the difference in price among related contracts is far less
than the price risk taken in an outright speculation. This is because related
futures will tend to move in the same direction.This spread was entered not only on the basis of seasonality,
but also by virtue of the formation known as a Ross hook (Rh). The spread
moved from -2.29 to 3.03 = $1,850 per contract. The margin
required to put on this spread was only $473, thus the return on margin is
more than 390%. Please note that the spread never retraced more than
$225!
Spread trading does not need live data
The most effective way to trade spreads is using end-of-day or delayed
data. You can save up to $600 per month in exchange fees.And you can save all
the money you would have had to spend for real-time data systems (which can be
up to $600 per month).
Spreads trend more often than do outright futures.
Spreads often trend when outright futures are flat. Look at the following
chart: Would you want to have been long live cattle from mid-April until end
of May?
But, what about a spread between Live Cattle and Feeder Cattle?
The spread moved from 13,450 to 19,980 = $6,530 per
contract. The margin required to put on this spread was only $1,013. The
return on margin is more than 600%.Spread trading is so fantastic
Well, it is not true that hardly anybody trades spreads - the
professional traders do, every day. But either by accident or design, the whole
truth of spread trading has been hidden from the public over the years.
While spreading is commonly done by the market "insiders," much effort
is made to conceal this technique and all of its benefits from
"outsiders," you and me. After all, why would the insiders want to
give away their edge? By keeping us from knowing about spreading, they retain a
distinct advantage.
The concept of trading seasonal trends and seasonal spreads has
been almost entirely overlooked by the hordes of daytraders who
today riffle the markets with their almost frantic noise. It is also
overlooked by the fund traders. By fund traders I mean those massive
pools of managed money residing in hedge funds, commodity pools, pension funds,
bond funds, securities funds, etc. In fact, with the exception of the large
commercial and institutional interests, the whole concept of seasonal trend and
seasonal spreading has been overlooked by most traders.
So far, so good.
By now you already know more about spread trading than
95% of all traders out there. You have taken the first step by learning
about the lost art of spread trading. But why is spread trading a lost art?
The reason is quite interesting: In the 1970´s and 80´s,
capital gains tax laws changed and computers came into the picture, which effectively
killed spread trading for the general trader. Current market conditions
dictate that traders who wish to minimize their risk have to learn to trade
spreads. So, if you are serious in getting started in spreads - I have
good news for you!
I have decided to share my knowledge of spread
trading because I realize that most current traders have never been exposed to
it!
Here is
how to take advantage of all the benefits of spread trading to optimize YOUR
trading results
Get started in Spread Trading
with simple
and effective trading techniques and tactics
Let me stress that it is not difficult to learn how to
successfully trade spreads. Unfortunately, there are some people who claim that
spread trading is difficult to learn, and that it is even dangerous to trade
with spreads. We know that some people just don't want to reveal to others how
simple and promising it is to trade spreads, and others are just repeating what
they have heard without verifying their information for themselves.
From my almost 50 years of successful trading experience, I can
say with assurance that spreads are neither difficult to understand nor
dangerous to trade. It is quite the contrary: trading spreads
is for the beginning trader with a small account, as well as a being a technique
that should be in every trader's toolkit.
Learn how to trade spreads to reduce risk
You already know that trading spreads entails less risk than does trading
outright futures, but you still need concepts and techniques about how to
trade them to keep the risk low.Let me show you an easy way to hedge yourself and minimize the risk. This
is also very useful for a daytrader who wants to hold a position overnight.
Position trades can be held considerably longer at less riskby spreading,
allowing you to participate in a big market move.
Learn all you need to know about Seasonal spread trade selection
Seasonal spreads are among the best trades possible for those who are
willing to wait for these excellent opportunities to come along. They have the
advantage of a very high degree of reliability over a period of many years.
Trades that work 80% or more of the time are certainly worth taking. Many of
these trades work 100% of the time for periods spanning 15 years or more. Yet
seasonal spreads must be filtered in order to obtain the very best results. A
lot of money can be lost by blindly taking these trades based upon
computer-generated dates for entry and exit. You will learn how to identify
the best spread for you and how to filter these seasonal spreads in order to
get best results.
Specific entry and exit signals
No longer have doubts about its being the right time to enter, or even more
importantly, the best time to exit a trade. I´ll show you specific signals
about where to enter and when to exit a trade to achieve the best results.
Trading spreads using technical indicators
Not all traders enjoy trading only from chart patterns. You will learn how
to properly use technical indicators to filter highly profitable trades.
