Spread Trading history

A phenomenon in recent years is the emergence of 'Spread Trading', mainly in Europe and the UK, and you may have heard about it in a day trading chat room or forum. Spread Trading is similar to ordinary trading, in the sense that you have the opportunity to go long or short on stocks, indices, or other instruments, but there the similarity ends. It is generally much more difficult to make money at Spread Trading because of the spread itself. The spread trading company makes money by quoting you a 'spread' between the bid and the ask. This spread can be immense - for example you will be lucky to find a spread smaller than 5 points on the FTSE, or half a point on the S&P. The spread trading company explains that this is more than compensated for by the fact that any profits you make are tax free (in some jurisdictions, anyway), and that they don't charge any other fees.

What they don't tell you is that the moment you enter a FTSE trade, for example, you are immediately underwater to the tune of the spread (eg 5 points) multiplied by the number of pounds (or dollars) per point you are spread trading with. Win or lose, they make that amount of money. You, on the other hand, face an uphill struggle even to reach break even. Say you go long the FTSE 100 at 3925 at £10 per point. If you wanted to immediately close that position, you would need to create a matching short, but the best price they will now offer you is what you bought at minus the spread - i.e. 3920. You just spent £50 (assuming the market didn't move). That is actually kind of expensive commission rates.

Spread Trading tips

What does this mean for a spread trading investor like yourself? Simple. If you pay the spread whether you win or lose, you need to get your percentage of winning trades up. Normally, traders balance the number of winning trades they are happy with against the average profit (or loss) per trade. That way, even a 50% average win ratio will make money, if the average winner is bigger than the average loser. With spread trading, however, this equation becomes skewed, and you need more winning trades, even if the average win size goes down slightly. This is why Camarilla is so perfect for spread trading - the percentage of winning trades is high, historically, meaning that the number of occassions when the spread trading company adds insult to injury by adding their spread to your loss is actually very small.Camarilla gives you a low risk entry point, and sensible points to take profits, meaning that even a 5 point move on the FTSE, for example, becomes a tradeable move for a spread trader.

Perhaps the single best piece of advice we can give you if you are Spread Trading is this:- compare the spread with the average daily volatility in order to decide whether you should be trading this instrument. In other words, if the spread offered by your broker on (e.g.) the FTSE is 5 points, but the daily range is only 20 points, you have to capture a LOT of the daily range just to pay the spread - not worth trading! On the other hand, if the spread on (for example) the S&P 500 is 0.5 points, and the average daily range is 15 points, that equates to only about 3% of the range, so yes, it is a good instrument to trade.

Spread Trading example

Does Camarilla work on the FTSE 100? Of course. Study this example from 21st May 2003:-

The 'SHORT' level was available to you the day before thanks to the Camarilla {b} Equation, as was the profit target. That is a 20 point spread trading move. If you had that information the day before, do you think you would have been up early on the day, ready for a spread trading rip roaring profit taking day?

Yep. So would we.

Read Trader Jack's account of Spread Betting the S&P on 14th November 2003