What is Spread Trading?

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Spread trading refers to the simultaneous purchase and sale of related securities, which are considered a unit and called legs of the unit. In simple terms, you the spread trader is trying to take a long and short position simultaneously for the purpose of making a profit. The difference between the two prices is what makes the profit.

The two prices, that are the most essential to track while spread trading, are the ‘offer’ and the ‘bid’. The ‘offer’ price is the price at which you can purchase the security while the ‘bid’ price is the price at which you can sell the security.

Here it is important for you to understand that if the spread is wide, the cost of placing the trade would be high while if the spread is tight, the trade placing cost would be low. This concept can be explained with an example:

Suppose you initiate a £10 a point contract where the spread is 2pt, the cost of opening and closing the trade would be £20. This denotes that the product on which the trade is being conducted moves at least 2 points so that you can make a profit out of the trade.

This implies that trading with firms that charge tight spread is advantageous rather than with those that charge wide spreads.

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