How does Spread Trading work?

 

The word 'Spread' in Spread Trading refers to the difference between the price at which you can sell a market and the price at which you can buy. The smaller the spread, or lower cost to trade, the better your potential returns.

If, after researching the market and fully understanding the potential volatility, you have a view that the market price will rise, you would place a "Buy" trade, this can also be referred to as ‘going long’.

If, on the other hand, your research leads you to believe that the market is going to fall from the current levels,  you would place a "Sell" trade, sometimes described as ‘going short’.

Now you need to choose the size of your trade. This is a very important factor and needs to be carefully considered. This is the amount you want to risk each time the market moves by 1 unit, either for or against you. So if you choose to "Buy" at a trade size of $5 per point move and the market rises by 10 points you would make a profit of $50 (10 points x your $5 trade size). If the market falls by 5 points you will lose $25 (5 points x your $5 trade size). 

     An example of a trade on Wall Street 30 Index market

 

Core Spreads offers fixed low cost spreads on all markets on our CoreTrader platform. So even when the markets are volatile, you'll know exactly what your charges to trade will be. 

The Wall St 30 cash (you will see this in the news as the Dow Jones 30) is one of our most popular markets and is found in the US Indices section of the Core Trader platform and can be traded in a size of just $0.50 per point move of the market. 

You will see two prices displayed, the 'Sell' is the price you trade at if you believe the market was going to fall from the current level, the 'Buy' is the price you would trade at if you think the market will rise from here. The difference between the two prices, the spread, represents our charge for you to trade with us, so in this instance, it's a fixed spread of 1 point. 

Let's suppose that, having researched the market to understand the potential volatility, you decide to place a sell trade of $5 per point at a price of 26420.

Later in the day, the market has fallen by 20 points and Core Spreads are now quoting a price of 26399  to sell and 26400 to buy. You decide that it's time to take your profit on this trade and so you need to close your initial sell trade. This is done by placing a trade in the opposite direction, so if your opening trade was a sell you now need to place a buy trade for the same trade size, in our example it is $5 a point.

You place a buy trade at the price of 26400 which closes the original sell trade you placed at a price of 26420. So how much money have you made?

This is calculated by taking the difference between the price of the second, closing trade and the price of the first, opening trade. In our example this is:

Opening sell trade at 26420 Closing buy trade at 26400
20
Difference in points

We then multiply the difference by the stake of the trade, which was $5 a point, giving you a profit of 20 x $5 = $100

 

So what would be the loss had the market moved against you? Using the example above, if the market had risen by 10 points, Core Spreads would have been quoting a price of 26429 to sell and 26430 to buy. If you decided to close your trade at this time you would need to place a trade in the opposite direction to your initial trade, so your first trade was a sell at 26420 for $5 a point and now you have to buy $5 at the buying price of 26430. 

This results in a difference in price of:

Opening sell trade at 26420 Closing buy trade at 26430
10
Difference in points

 

The difference is then, again, multiplied by the stake of $5 resulting in a loss of $50.

 

In both examples the Core Spreads trading charge, a fixed spread of 1 point, doesn't change, irrespective of how volatile the market may be. This is why it is so important to trade with a broker who has competitive fixed costs, allowing you to reduce your charges and potentially maximise your returns.

 

Core Spreads

Core Spreads is trading as it should be. Tight fixed spreads and razor sharp execution on thousands of markets.