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Intraday Spread Trading

The futures spread is perhaps the least used and least understood vehiВэcle in the world of futures trading. To most traders the idea of spreading a market is totally foreign. Can you imagine their surprise when I sugВэgest trading spreads in the day time frame? Whereas many traders conВэsider spreads to be an intermediate- to longer-term vehicle, I feel that some spreads can also provide day-trading opportunities. Provided you select the right spreads, you can use many of the technical tools I've described in this book as entry and exit methods.

As you know, a futures spread involves buying one contract and selling another. You are long and short at the same time. The contracts may be in the same markets or in different markets. In other words, you can be long June cattle and short October cattle which would constitute an intracom-modity spread. You can buy July wheat and sell July corn. This is an intercommodity spread. Typically intercommodity spreads are better vehicles for day traders, since these spreads tend to exhibit more of the characteristics which are prerequisites to successful spread day trading.

Preselection: The Key to Profitable Spread Day Trading

The key to profitable trading spread is the preselection process. In other words, you need to select spreads for day trading which meet the folВэlowing criteria:

1. They must be volatile. In other words, they must be spreads which tend to show sufficient price movement during the day to make them viable trading vehicles.

2. They must have a sufficiently high tick value. High tick value makes spreads worthwhile from the day-trading perspective.

3. They must be sufficiently liquid. Liquidity permits entry and exit withВэout difficulty.

With these factors in mind I will now outline the processes and methВэods for day-trading spreads.