The spread trading strategy is a popular way to make money in financial markets by engaging with commodity and financial asset derivatives. There are many ways to utilize futures spread trading for Bitcoin and other cryptocurrencies. We will talk about this technique and ways to automate it using publicly available tools.
What is futures spread trading?
The first thing you should know is what a futures contract is. It is a financial derivative based on a contract representing a specific asset. The holder of such a contract agrees to sell or acquire a particular quantity of assets at a certain point in time in the future. The earliest incarnations of these instruments appeared in antiquity, when traders and farmers attempted to protect themselves from numerous hazards such as weather and war.
Today, a futures contract can be issued for any financial asset. Bitcoin and Ethereum are based on perpetual and standard futures.
When it comes to futures on commodities, traders can benefit from a spread — the difference between buy and sell prices. How to trade spreads? To benefit from a price discrepancy, a trader may utilize two types of approaches:
- Inter-Commodity. You may use this approach to take two positions on codependent assets or commodities. A good example is an electric car manufacturer and an oil producer. You may be bullish on the industry of electric vehicles and buy futures on shares of a company that produces them. Simultaneously, you sell futures on shares of an oil company or oil in general. The profit comes if the former outperforms the latter.
- Intra-Commodity. This approach is useful for retail traders who understand markets and can predict how prices may change over a long period. For example, you may buy futures on a commodity with an expiration date in March and sell futures expiring by the end of the year. The difference between these prices will be your profit when you liquidate your positions.
Crypto futures spread trading: the complete guide
Cryptocurrencies are slightly different from traditional assets and commodities. First Bitcoin futures spread trading techniques started popping up in 2017 when derivatives were introduced to the crypto market. Strategies involving cryptocurrencies work for people capable of predicting changes in prices over several months.
Here is a practical example and a simple spread trading tutorial:
- If you feel the price of Bitcoin will rise over the next month, just purchase a one-month contract and sell a two-month contract. The price difference is what you keep after liquidation positions.
- If you believe that the price of Bitcoin will go down during the next month, you need to sell a contract one month out and buy a contract two months out, again, acquiring the profit by catching the price discrepancy within the two months.
It does sound quite simple and it is. However, spreads are usually quite small, and making money without using leverage is challenging and takes a long time. You may try working with the margin account or increase the size of your portfolio and automate the process to increase the number of orders you make on the market at opportune moments.
There are specific strategies that work for day traders working with futures. These can be automated using platforms like WunderTrading where retail traders use signals from the analytical website Tradingview to make orders automatically. You can also adjust stop-loss and take-profit scenarios to control risks.
Should you try spread trading?
While many people believe that this trading system is excellent for beginners, futures spread trading strategies are quite complicated and require retail traders to understand price dynamics and make correct predictions about the market. Spread trading can backfire epically if you fail to make a correct prognosis and use leverage.
Use WunderTrading’s free account to launch a couple of bots with a spread trading strategy and backtest them on the Bitcoin chart. Adjust variables until you find a good setup that appears to deliver results consistently against the historical data. While past results will never guarantee profits down the line, you may come up with a strategy that delivers reasonable profits regularly.
Spread trading is great when you know the history and can extrapolate the available data to make correct guesses about the market direction in the nearest future. However, people who do not have the same keen eye for price dynamics should be careful when trying to make futures spread trading work. These are quite dangerous strategies for beginners.
A futures spread trading approach is deceptively easy and requires a lot of knowledge about the assets you want to work with. When mastered, this technique can be extremely effective and bring you massive profits!
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