A Beginner’s Guide to Trading

Spread trading, also known as contract trading, has become one of the most popular tools for private traders worldwide. Whether you’re new to trading or looking to expand your knowledge, understanding how spread trading works is essential. In this article, we’ll break down the basics of spread trading, its advantages, and why it’s a preferred choice for many traders.

What is Spread Trading?

At its core, spread trading involves two prices: the buy price (ask) and the sell price (bid). The difference between these two prices is called the “spread.” When you enter a spread trade, you’re essentially agreeing with your broker to exchange the difference between the opening and closing prices of an underlying instrument, multiplied by your stake size.

The key takeaway? You’re not trading the actual asset. Instead, you’re speculating on its price movement. This means you don’t own the asset, which can be a significant advantage for traders.

Why spread trading is popular
Spread trading was initially designed for institutional investors in the 1990s but has since evolved into a user-friendly product for retail traders. 
Here’s why it’s so appealing:

• No ownership required: You don’t need to buy or store physical assets. For example, if you trade crude oil, you’re not buying barrels of oil—just speculating on price movements.
• Access to global markets: You can trade a wide range of instruments, including stocks, indices, commodities, and cryptocurrencies, all from one platform.
• Margin Trading: Spread trading allows you to trade on margin, meaning you only need a fraction of the total trade value to open a position. This can amplify both gains and losses, so it’s important to manage risk carefully.

How Spread Trading Works

Let’s break it down with an example. Suppose you want to trade Bitcoin. Instead of buying actual Bitcoin, you open a spread trade contract. If the price of Bitcoin rises, you profit. If it falls, you incur a loss. The beauty of this approach is that you’re not tied to owning the asset—you’re simply speculating on its price direction.

Spread trading contracts mirror the real market 100%. For instance, if you trade a DAX index contract, it will reflect the actual DAX index price. This ensures that your trading experience is as close to the real market as possible.

Key Takeaways for New Traders

• No ownership → You don’t own the underlying asset, which simplifies the trading process.
• Margin trading → You can trade with leverage, but always be mindful of the risks.
• Versatility → Spread trading allows you to trade almost anything, from stocks to commodities, without the hassle of physical ownership.

Spread trading is a powerful tool for traders, offering flexibility and accessibility. However, like any form of trading, it requires a solid understanding of the market and risk management.