Why is good to try alternative trading strategies such as spreads?

When we think about trading, the first image we have is Wall Street, Canary Wharf, Frankfurt,  Chicago, Tokyo, Toronto, Singapur, Hong Kong, big investment banks, hedge funds, asset managements.

    Own elaboration

One of the biggest mistakes is thinking about getting rich quickly trading the financial markets. It doesn’t matter how many books you read or how qualified you are. Obviously, it helps but it's not enough. Also, you should consider that you can’t compete with the institutional investors and Banks as they can afford advanced technologies and they employ a lot of people.

The most important thing is risk management. Being focused and learning by doing is very important as well. Maybe you have a full time job and you would like to try to get an extra income from trading. If this is the case, you need to adapt your trading style to your situation. Maybe, instead of doing day trading, you need to look for a medium or long-term strategy.  If you are an individual trader or investor (not professional) I’d recommend the following steps:

1. Choose the market you want to trade with.
2. Making a trading plan and assessing the risk you are willing to take per trade (I wouldn´t risk more than 2% of the portfolio)
3. Adapt the strategies that suit with your current situation, and backtest them if possible (the best way is open a paper trading account) before using real money.
4.  Start trading and adjust the strategies if needed.

Trading is a long tough journey and carries a high risk even more if you use leveraged strategies. These 4 steps are a sum up about the whole process, I think I can make 20 steps or even more but it’s not the purpose of this post.

Spreads

    Source: TradingView, Eurodollar spread GEH18-GEZ18

This is a spread between two contracts of eurodollar interest rate futures. In this example, I’m using the Jun 18 and Dec 18 contract. As you can see it moves really well with less volatility than trading the outright. Let me make it clear with the following capture:

    Source: TradingView, Eurodollar spread GEH18-GEZ18 vs GEZ18

I´ve represented the Eurodollar Dec 18 futures in blue and purple while the spread between Jun18 and Dec18 is green and red. You can’t see the differences in the chart due to the scale but while the outright made a move of 40 ticks the spread move only 14.

The logic between the spread is different from the outright, you are trading the differences between 2 contracts.Basically, you are betting that the difference between both contracts will increase or decrease. 

The advantages of this strategy are:

1.  Less volatility
2. The margin required is less than the one if you trade an outright
3. You can do the spread between 2 different kind of futures (intra spreads, inter spreads)
4. You can take advantage of seassonality in commodities (I will write an article in the future)
5.  There are Exchange traded spreads, that you don’t need a specific funcionality in your trading platform

The disadvantages:

1. You need to know that you are trading the difference between two contracts so the logic is different
2. Higher execution cost
3. You need an autospreader or an specific functionality in your trading platform that is expensive

I hope you like it. I will write about different strategies in the future. Let me know if you are interested in an specific one. 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved