What is spread trading

& how does it work?

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DEFINITION

Spread trading (AKA Spread Betting)

Spread trading is a way to speculate on financial markets, and perhaps the simplest way to do so.

You can choose from plenty of markets including stock indices, shares, commodities and forex, and you don’t have to own whatever it is you’re trading either. All you need to do is speculate on whether the price will rise or fall, and if you’re correct, you’ll make a profit. On the flip side, you’ll suffer losses if the market moves in the opposite direction.

So, what is 'the spread' in trading?

When you want to make a trade, you’ll be given a buy and a sell price. If you think the market price will rise, you buy (aka go long).  Expecting it to fall? Then you sell (aka go short). The spread is the difference between the buy and the sell price. This is what determines how much it will cost you to make the trade — the smaller the spread, the cheaper it will be. However, it’s important to bear in mind that spreads can be either fixed or variable.

Fixed spreads don’t change but variable ones have the potential to rise if there is market volatility, so your trading costs will become more expensive than they were when you opened your position.

Hang on! I’m a new trader, is this right for me?

Many new traders aren’t sure exactly what strategy to follow when they first get started. However, as spread trading is arguably the most straightforward way to speculate on the markets (especially compared to complicated financial instruments like CFDs), this is certainly worth exploring.

You can trade in the currency of your choice and also choose exactly how much you want to stake per point, giving you total control over how much you want to trade. This means you can always stick to your personal risk profile.

BID-OFFER SPREAD

Why do I keep hearing about the bid-offer spread?

A bid-offer spread is just another way to present the buy-sell prices we’ve already talked about. If you think a market is going to decline, you would look at the sell price which would be listed under ‘BID’.

The buy price (what you’d pay if you predict a market will increase in value) is greater than the sell/BID price and will be listed under ‘OFFER’.

Some platforms will use a bid-ask spread instead, and this is also the same thing.

3 things that can impact the bid-offer spread

Liquidity

If whatever you’re trading has greater liquidity, it can be easily bought and sold and will often have a smaller spread. For example, the most popular currencies in the forex market (like the US dollar and pound sterling) have very small spreads because these currencies are widely considered the most liquid assets out there.

EXAMPLE

Spread trading in action

Say you want to speculate on the price movements of the UK 100 Cash (aka the FTSE100), you might get this bid-offer spread:

BID: 7224.8

OFFER: 7225.2

SPREAD: 0.4PTS

And you expect the market to rise, so you buy £5 per point for 7425.2.

How a trade might play out

A Winning Spread Trade

The market has risen and you decide to close your trade once it has gone up by 10 points.

There are new prices: 7434.8 to sell and 7435.2 to buy. You need to trade in the opposite direction to claim your profit, which means you’d sell £5 per point at 7434.8. Now, you’ll bank the difference between your opening and closing trades.

7434.8 - 7425.2 = 9.6

And as you put up £5 a point…

9.6 x £5 = £48 profit

A Losing Spread Trade

Unfortunately you got it wrong and the market ended up falling by 10 points, and these are the new prices: 7414.8 to sell and 7415.2 to buy.

As you have gone long, you now need to sell £5 per point at 7414.8. This is how your losses are calculated.

7414.8 - 7425.2 = -10.4

And as you put up £5 a point…

-10.4 x £5 = £52 loss

How a trade might play out

A Winning Spread Trade

A Losing Spread Trade

The market has risen and you decide to close your trade once it has gone up by 10 points.

Unfortunately you got it wrong and the market ended up falling by 10 points, and these are the new prices: 7414.8 to sell and 7415.2 to buy.

There are new prices: 7434.8 to sell and 7435.2 to buy. You need to trade in the opposite direction to claim your profit, which means you’d sell £5 per point at 7434.8. Now, you’ll bank the difference between your opening and closing trades.

As you have gone long, you now need to sell £5 per point at 7414.8. This is how your losses are calculated.

7434.8 - 7425.2 = 9.6

7414.8 - 7425.2 = -10.4

And as you put up £5 a point…

And as you put up £5 a point…

9.6 x £5 = £48 profit

-10.4 x £5 = £52 loss

KNOW THE COSTS

What are spread charges?

The spread determines how much you will be charged to make a trade, with smaller spreads being the most cost-effective.

But remember, spreads can be either fixed or variable! This is very important if you want to keep your trading costs as low as possible.

  • Variable spreads could change at any time, so if the market you’re trading on suddenly becomes volatile, the spread will widen and your trading costs will instantly increase. What if the spread is the widest at the point you need to close a trade? As this is out of your control, you may end up paying much more than you planned and have diminished returns as a result.
  • Fixed spreads are just that, fixed. They remain unchanged regardless of what happens in the market. This means they allow traders advantages such as more transparency, lower costs and safeguarding against volatility.

This is why we are very pleased to offer low fixed spreads here at Trade Nation.

No matter what happens in the markets, you can be certain that your spread will never change. Therefore, you can enjoy minimal costs, maximum returns, and total transparency. And on top of that, we offer a unique loyalty bonus where we return up to 25% of the spread you pay every month*. It’s up to you whether you want to withdraw it or trade it, and there are absolutely no terms, conditions or questions to worry about.

However, do remember that trading is never risk-free and losses are a regular occurrence. For that reason, make sure you always understand the risks before adopting a position, and only ever trade with what you can afford to lose.

At Trade Nation, as well as offering low fixed spreads and a loyalty bonus*, we also have a variety of risk management tools to help you trade responsibly.

We give you the opportunity to explore spread trading on our easy-to-use platform. Simply set up a free practice account and get to grips with making trades without putting up your own money. This also gives you access to lots of useful resources that will teach you more about the ins and outs of spread trading.

HOW TO START PRACTICING SPREAD TRADING WITH TRADE NATION

1. Create a trading account with Trade Nation

You can open a full account to start trading immediately or explore the ins and outs of our platform with a free practice account.

2. Explore our markets

Log into your account and open the trading platform. Here you will see all the markets we offer including forex, indices, shares and more.

3. Make the trade

Choose the asset you want and make your trade.

Set up a practice account, it’s free!

Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.