Most traders note that recently markets have changed dramatically; they have become more chaotic and less predictable. Volatility has increased as well as risks. Classical methods of trade, that brought profit ten or twenty years ago, now cease to work under the current conditions.
Thus, traders who focus on trying to predict the direction of the market are often doomed to failure. Therefore, the question concerning the existence of such trade methods becomes increasingly important, which allows us to receive a relatively stable income, regardless of the general market situation. In this article, we will talk about one of these approaches called spread trading.
Forex spread trading
Spread trading differs from the classic methods of trading on Forex. This way of working makes it possible to receive a constant income regardless of market conditions and whether you decide on choosing the best forex trading platform or not.
Spread is the difference between the bid and asking prices. It may seem strange, but trading a spread on forex can mean buying a basket of platinum and simultaneously selling a basket of silver, or soybeans and products from them (eg. soybean oil and soy flour), or buying oil and selling petroleum products.
The most important thing in trade spreading is to correctly choose a pair of tools that will make up the spread. It is important that the difference between their prices change most of the time in a certain period. Therefore, they try to select tools with high correlation and similar characteristics, for example, securities of one company from different stock exchanges, or futures on different execution dates, or securities of companies / enterprises from one industry.
Forex Spreading Algorithm
The prevalence and certain popularity of trading in the spread on Forex has already led to the formation of stable spreads:
● Crash-spreads (between soybeans and products from them); ● Crack spreads (between oil and its products); ● Currency spreads (platinum and silver, gold and silver, platinum and palladium, palladium and silver); ● Index spreads.
Variations of the spread trade are paired trading (a spread between two instruments with high correlation) and arbitrage trading (a spread between related or identical instruments, with almost no market risk). The arbitrage trade is divided into:
● Spatial arbitration (one instrument is traded on different markets); ● Calendar arbitration (futures with different delivery dates); ● Equivalent arbitrage (they trade in related instruments, where the price of one is linearly dependent on the price of the other, for example, the share is a depositary receipt).
If the spread is done correctly, then it becomes more profitable to trade with them than with individual instruments. Spread behavior is more predictable than the behavior of individual instruments since on similar financial instruments, market factors operate synchronously, and synchronous decline or synchronous growth occur. Use spread trading to increase your profits today!
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