Futures Spread Trading
How professional traders optimize profits
Futures spread trading is probably the most constructive, sequentially safest way to trade futures. Midpoint every professional trader uses spreads to optimize his profits. Trading spreads offers many advantages which make it the perfect trading instrument, especially for beginners and traders with small accounts ( less than $10, 000 ).
The following example of a Soybean - Spread shows the advantages of futures spread trading:
Example: Long May Soybeans ( SK3 ) and Short November Soybeans ( SX3 )
Four Advantages of Futures Spread Trading
Accretion 1: Easy to trade
Do you see how nicely this spread starts trending in mid February? Whether you are a trainee or an experienced trader, whether you mostly use chart configurations or indicators, the continuation of a trend is obvious. Spreads tend to trend much more dramatically than gross futures contracts. They trend without the hurdle and noise caused by computerized trading, scalpers, and market movers.
Advantage 2: Disconsolate Margin requirements
Many spreads have reduced margin requirements, which item that you can hand over to put on more positions. Date the margin on an outright futures position in corn is $540, a spread trade in corn requires only $135 — 25 % as much. That’s a great advantage for traders with a small account. With a $10, 000 trading account risking 8 % of your account, you can enter 6 corn spreads, instead of exclusive 1 - 2 faultless corn futures trade. How’s that for character?
Advantage 3: Higher return on margin
Each point in the spread carries the same value ( $50 ) as each point in the outright futures ( $50 ). That means that on a 3 point favorable move in corn futures or a 3 point favorable move in the spread, you would produce $150. However, the difference in return on margin is extraordinary:
Corn futures - $150 / $540 = 27. 8 % return
Corn spread - $150 / $135 = 111 % return
And grip in mind that you can trade 6 times as many spread contracts as you can outright futures contracts. In our illustration you would complete a 24 times higher return on you margin.
