SPREAD TRADING. What is it?
SPREAD TRADING. What is it?
Good day to all!
Friends, in this article I wanted to tell you about spread trading, or spread trading . Our subscribers channel "Venture capital Investment» t. me/ventureinvestment_channel has repeatedly found similar trading recommendations on the channel:
For a more complete understanding of the specifics of such trading, I will focus Your attention on the most important moments.
So, to begin with, let's define what we are going to trade.
SPREAD (from the English . spread "spread») — the difference between the best prices of orders to sell and buy at the same time on any asset (stock, commodity, currency, futures, options).
The word SPREAD is also called:
· the difference in prices of two similar goods traded on open markets (for example, the difference in prices for different metals, grades of oil, etc.) - we are INTERESTED in THIS!!!
· synthetic a derivative financial instrument consisting, as a rule, of two open positions with opposite orientation and / or different underlying assets and / or different execution dates;
· the difference in yield levels for different financial instruments.
For the right trade SPREAD, you need to consider a number of factors:
1. Opening a SPREAD POSITION on assets must be done in the same monetary equivalent. Let's say you decide to open a spread on futures between the prices of gold and silver. To correctly calculate the position size, we need to calculate, how much money there is in gold and silver in 1 contract. To do this, you need to know the specification of both contracts, which looks like this for gold and silver:
Each futures has its own specification, you need to carefully read it familiarize.
After that, you need to calculate the monetary component of 1 contract . To do this, you need to do these calculations, namely, multiply the number of contracts by the number of ounces in it, then by the current value of gold, and even more times the current dollar-ruble exchange rate: 1*1*1730*72.5 = 125 425 rubles – this is the exact amount in rubles that we can buy or sell gold by opening a single contract. We make similar calculations for silver: 1*10*17.30*72.5=12 542.5 one ruble in one silver contract. It turns out that in order for us to open the correct position, you need to buy / sell gold to silver in the ratio of 1: 10
2. The choice and liquidity of instruments, the moment to enter a position, the planned SL and TA. To minimize financial losses when opening a SPREAD POSITION , you should consider several factors moments'. Liquidity of the traded assets. For example, gold and silver futures are liquid, in a " glass» there are always a large amount of futures buying and selling, in contrast to the futures on palladium. To enter a SPREAD POSITION, it is better to choose extreme price levels. I'll explain on the example. In 2006, the price difference between gold and silver was 40 , meaning silver was worth 40 times less than gold. When the crisis of 2008 occurred, this difference exceeded the 80 mark . That is, in crises, silver declines in price faster than gold, and when the situation improves-exactly the opposite. Look at this graph:
You will see that the maximum price difference in the entire history of observation was in March of this year and amounted to about 120 . Regarding the definition of levels for SL andTA . Here it is better to base your risk parameters on the transaction. There is no universal recipe here, just try to make sure that yourTP was always more than SL .
3. Pros and cons of SPREAD trading.
Main plus from such a trade, in my opinion, this is less possible risks. Since two different-directional positions are opened in similar assets, you are less likely to make a mistake with the direction of movement. Let's say you sold gold and bought silver. If the price of metals rises, you will lose on a short position in gold and earn on long in silver, and changes to your account will go if one of the metals will grow or decline in price more slowly than the other. The same situation will occur if you open a spread between BRENT and WTI oil . Oil prices have changed by more than 60 this year dollars , and the spread is less than 10 .
Among the disadvantages, these are more complex preliminary calculations, you need to conduct a more in-depth analysis of the traded instruments, you will need trading experience and an understanding of the specifics of trading.
This is more of an introductory article where I I described SPREAD TRADING very briefly . Of course, in reality, there are many more factors and conditions that can affect SPREADS . But, any path can only be mastered by the walking one. And if you want to develop your trading skills, learn new methods and tools, then nothing can help you prevent you from starting SPREAD trading
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