This article is taken from the YourTradingEdge magazine (MAY/JUN 2011 issue).
Jay Richards is a spread specialist in futures at Aliom Financial Markets. He owns and operates Just Spreads, a website dedicated to providing spread trade opportunities, market analysis, daily updates and continuing education across a select group of US and Australian futures spreads.
Spread trading is a powerful trading strategy that many retail traders have never heard of or know very little about. Too many investors associate spread trading with hedging and think its use is limited to banks and commercial traders. Spread trading began when markets were created, so risk could be hedged by primary users and transferred to another party. Banks and commercial traders know this and use it as their main trading strategy. They make money because they are risk averse and spread trading is their edge.
Spread trading has traditionally been applied to futures. The strategy requires a trader to hold a long and a short position simultaneously in the same or closely related markets. Since the introduction of CFDs, shares can be spread traded; this is commonly referred to as pairs trading. The CFD allows a trader to sell or be short a share in a leveraged manner similar to a futures contract. In each instance the trader is interested only in the price difference between the two contracts, as opposed to the outright price of the underlying futures or shares.
Source: http://www.fxstreet.com/education/trading-strategies/3-advantages-of-spread-trading/2011-08-31.html
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