facebook  Twitter youtube  blogger

Traders Notebook - Futures Spreads

With the Highest Probabilities for Success

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, or the difference between two related futures contracts in different markets.

For example, a spreader might take the risk of the difference in price between August Soybean Meal and December Soybean Meal (see picture below), or the difference in price between December Kansas City Wheat and December Chicago Wheat.

 

 

What makes Futures Spread Trading such a profitable and easy way to trade?

  • There is no stop running when trading spreads. It is not possible to use stops in a spread trade. Because you are long in one market and short in another, you have become invisible to and immune to "stop fishing."

  • Spreads can considerably lessen the risk in trading compared with straight futures trading. Every spread is a hedge. Trading the difference between two contracts in an intramarket spread results in much lower risk to the trader.

  • Spreads on futures normally require lower margins than any other form of trading, even lower than the margin requirements for option trading. The result is much greater efficiency in the use of your capital. It is not unusual to be able to trade 10 spreads putting up the same amount of margin as required for 1 outright futures position.

  • Spread trades are less volatile than other forms of trading. They are considerably less volatile than share trading, option trading, or straight futures trading. In fact, it is because of such low volatility that margins for spreads are so low.

  • Spreads typically trend more often, more steeply, and for a longer time than do other forms of trading. Since "the trend is your friend," spread trading is friendlier. Spreads trend because of something real taking place in the underlying fundamentals. They are not moved by market makers and market movers, who push markets to run the stops.

  • Spreads create a more level playing field. Because there are no stops possible, spread trading is a purer form of trading.

  • Spreads avoid problems associated with a lack of liquidity. You can trade in less liquid markets. Since you can trade where there is less liquidity, you have more trading opportunities than when not trading spreads.

  • There is less concern with slippage. Spreads require less precise entries. Getting an exact fill becomes less important. Sadly, the whole truth of the benefits of spread trading has been kept secret from the public.

  • Spreads in certain situations offer greater odds of winning, but never greater probabilities of losing

  • Spreads are an excellent way to trade seasonal tendencies. When traded seasonally, the percentage of wins against losses is high.

  • Spreads enable you to take advantage of inverted markets. When a market is inverted, you have two possibilities to take profits – once when prices inverts, and again when prices return to a normal progression.

How can Traders Notebook help you to become a better Spread Trader?

Traders Notebook is THE leading Newsletter and Andy is THE trader when it comes to Spread Trading. In Traders Notebook you will get the trades with the highest probabilities for success together with the complete trading plan (risk, stop loss, targets). For each trade Andy will explain why he thinks the trade has a good chance for making profits. Traders Notebook is not a black box newsletter, with Traders Notebook you get all the information YOU as a TRADER need!

"There is a lot to learn and every trade I do with TN I learn something."
-- Bruce Bourhill

 

 

Additional Info

  • Time: Short Term Trading, Long Term Trading
  • Market: Futures, ETFs/Stock

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.