Understand The Various Types Of Spread And The Best Momentum Indicator To Take A Trade

Understand The Various Types Of Spread And The Best Momentum Indicator To Take A Trade

The spread strategies are broad of two types. These are the intra-market spreads and the inter-market spreads.

  • Intra-market spread – This is where the futures trader enters into two separate futures contracts of the same asset. So for example, the trader will buy a May wheat contract and sell a June wheat contract simultaneously. This is a strategy that is taken when the traders feel that the wheat prices will rise in the short term but then will start to fall in price after the correction and once it starts to follow the long term trend,
  • Inter-market spread – This is when the futures trader enters into two futures contacts into two different markets. Here the trader says will sell the futures contract on one exchange and at the same time buy the futures contract on another exchange. The trade will either end in a profit or a loss based on the relative difference that rises between the two instruments.

The advantage of trading using the spread strategy

There are some advantages when trading using the spread strategy. When you trade in the futures spread then it helps to even out the volatility that is experienced when the trader takes just a single futures trade at a time. This makes the trade highly vulnerable to the price swings.

The market moves in setting trends and this approach will let you capitalize on the broad momentum of the market.

The risk to reward ratio is also improved when you trade using the spread strategy. The chances of the market reversing unexpectedly are bleak.

Choosing a momentum indicator to trade in the futures market

You may also want to use the momentum indicators to time your trades in the market. These technical tools can be used even when you trade the futures spread strategy. However, the problem is that there are many momentum indicators to choose from and this can get you confused about which one to use.

The answer to this is that there is no one best momentum indicator. You need to choose one that closely matches your style of trading. The stochastic is useful when taking a large number of trades and the ROC is better for fewer signals but better accuracy.

These indicators let you gauge what the momentum of the trade is in the broad market. It also betters your risk to reward ratio.

It is important to base your trades on a strategy, using the technical tools as well by keeping a close watch on the current news that could affect your trade.