What Is Spread Trading and How Does It Work?
Mitigating risks is a critical skill that must be obtained by any trader. While some strategies are inherently riskier than others, you can use interesting trading methods to significantly reduce risks while also reducing potential profits. Day traders usually prefer using such approaches. However, many novices will benefit from implementing a similar style to learn how to control losses.
The history of financial markets is full of interesting discoveries like spread trading, a technique centered on using the difference in prices between closely related assets. A spread trading platform is a marketplace where you can simultaneously buy and sell related assets while enjoying the benefits of leverage. Since you need to short and long different assets, you have to use your margin trading account.
What are trading spreads?
When you sell or buy a single asset, the price volatility can be devastating. Predicting the movement of any given asset is hard, especially in volatile crypto markets. However, you can have a much better grasp of the overall market situation and make decisions based on your forecasts while mitigating risks by offsetting losses generated in long positions by shortening related assets.
Let’s say, that you want to spread trading Bitcoin. In this case, you will need to find a related asset. Ethereum is a great candidate since it is trading in a similar market and is affected by the same macroeconomic factors. You buy BTC and sell ETH simultaneously, If BTC goes up and ETH goes down, you will earn a lot on the spread between two prices (hence, the name spread trading means the difference between assets at any given moment).
Simultaneously, you will minimize losses if BTC goes down, and ETH goes up. There are other outcomes, but in most of them, you will either significantly reduce losses or earn money. Spreads are usually quite small between related assets and do not generate large profits, but they are predictable and safer compared to many other styles of active investing.
There are two principal ways to utilize the strategy:
- Inter-market spreads are orders that involve two closely related assets that must be traded in the same time frame. BTC and ETH example is a great illustration of this method.
- Intra-market spreads are orders that involve only one asset but are traded on different expirations dates. We also call it spread trading futures since it can be done only with future contracts.
Automating spread trading
One of the best ways to efficiently utilize this simple strategy is to add automation. Bots are excellent for this particular task due to several reasons:
- Bots never sleep, rarely make mistakes, and react instantly to any market changes. They make perfect candidates for executors of spread betting systems.
- You can use a variety of different settings to set up stop loss and take profit values. In this case, bots will be reliably mitigating losses.
- Spread trading relies on consistency above all else. You need many small trades to make significant profits. While you may feel tired after a day of intense performance, bots never miss out on an opportunity to place an order.
Many interesting automation platforms offer great products to those interested in implementing contemporary technology in their investment efforts. WunderTrading is a great example of a service integrated with numerous popular crypto exchanges and external analytical platforms like TradingView.
The best part is that you can sign up and use the free plan to test spread trading strategies without paying for automation. If your system works well, you can upgrade your plan and start implementing your method on a much larger scale.
Should you try spread trading?
This particular technique does not require in-depth knowledge of financial markets or technical know-how. It is a good choice for novices who do not know the behaviors of some assets or want to trade with leverage without risks associated with margin trading. Since using spreads is way less dangerous, many exchanges offer leverages on better terms for traders.