The dream of all those who habitually trade online is to try to reset the risks to zero as much as possible in order to avoid huge losses and always ensure profits; for this reason some important strategies have been developed, such as spread trading, a particular technique that allows you to have a completely neutral exposure on the market.
The word spread in itself means difference while the word trading means trading, together in the trading world, the spread trading means therefore the difference of a price between two different instruments but which belong to the same identical product category. It is obvious that it is not therefore a directional trading, since among the most important factors, if not the only one, to keep under control is the price difference between the two instruments.
One of the main characteristics of this trading strategy is the simultaneous purchase by a trader of a transaction called Long and a sale called Short on securities or other similar financial instruments of the same sector; in this way the price difference between the two, which very often move in the same market direction, will be exploited.
Key elements of this kind of trading strategy include commodities and seasonality. At certain times of year, in fact, the prices of many raw materials see their price completely changed due to the influence of large commercial forces. For example, the Coca-Cola company, to make its fantastic drink, must buy very high quantities of sugar, it is obvious that before doing so, it waits for the price of the commodity to fall.
In short, it allows you to earn, unlike Forex or the stock market, not by buying when the price has fallen and reselling when the price is rising, but through the purchase of an asset and the sale of another related instrument and therefore the greater the price difference between the two the greater the gain itself. It may happen that there are differences in trends, but only when there are economic events affecting a specific sector company and therefore not all sectoral securities.
An example would be the investment of insurance securities, which are likely to move in the same upward and downward directions, but it is virtually impossible for them to move to the same extent. If the trend is upward, you can earn money by selling the weakest insurance stocks while buying those that seem to be moving upward, so the profit will really be maximized!
Dealing with spread trading may seem very simple, but in reality you have to be very careful, especially when choosing the pair to invest in to avoid the risk of loss. It is obvious therefore that it is not possible to operate exploiting this trading strategy without having a good eye and without having first made a careful analysis of the securities and the financial market, an idea is to rely on an analysis based on the previous market trends taking as a point of reference long.
Using this analysis, it will be possible to trade with spread trading and identify the behavior of securities in the previous market period and thus evaluate the upward or downward trend. With spread trading you can work with short, medium and long-term strategies, of course it all depends on the strategy and choice of the trader to whom we entrust the task.
Despite being a delicate strategy, taking advantage of spread trading over another trading strategy could bring many advantages, including:
The commitment to this strategy is much less than the others, as it is based on end-of-day data.
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