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.
Or he can trade the difference between two Exchange Traded Funds. Officially, Intramarket spreads are created only as calendar spreads.
You are long and short futures in the same market, but in different months. An Intermarket spread can be accomplished by going long futures in one market, and short futures of the same month in another market. Intermarket spreads can become calendar spreads by using long and short futures in different markets and in different months.
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.
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. 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. That's a great advantage for traders with a small account. Spreads give a higher return on margin. However, the difference in return on margin is extraordinary:. 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 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.
You can spread one stock against another e. You can spread one index against another e. 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 Spread trading does not need live data. The most effective way to trade spreads is using end-of-day or delayed data. 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? 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.
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: 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! Joe Ross, creator of the Ross hook, has more than 50 years of trading experience.
In he founded Trading Educators, Inc. He started writing books, giving seminars and private tutoring. To date, in addition to his own trading, he has written 12 books and personally taught thousands of traders. Thus originating the manual Trading Spreads and Seasonals , which has become a classic after just a short time, and the top selling book in the field of spread trading.
This hard cover manual contains more than pages of practical and interesting information about spread trading. It expands on the topics mentioned above, giving you a better understanding of and insight into what spreads really are and, more importantly, how to place and manage your spread trades.
You will learn everything you need to know about Inter- and Intramarket Spreads, about Inter-Exchange Spreads, and markets suitable for spreads. You will learn how to use spreads to make money in sideways futures markets, and how to reduce and greatly eliminate the effects of volatility and uncertainty. 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 risk by 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. 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. 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. Many readers have told me that this manual is worth its weight in gold and that the information in this book, reflecting years of knowledge and experience, is worth a lot more than the money we charge for it.
However, we are holding to the same price as we have always charged, in fairness to our customers. Joe introduces filters and how to use technical indicators. This is a trading manual not a book about trading.More...