# Spread Chart

**A bit of theory:**

A **spread **on the market is the difference between the value of two baskets of financial instruments. The synthetic instrument (spread) received in such a manner can be traded the same way as regular financial instrument. The only difference is that when buying a spread, you are actually buying the first basket and selling the second one; when selling a spread, vice versa. The main idea when creating a spread is to build such a financial instrument that will fluctuate around its average levels most of the time. As a result, trading such a financial instrument is easier compared to a regular financial instrument, since you only have to buy and sell a spread on the deviations from those averages.

**Main strategies of spread trading:**

***Pairs trading** is different, because the baskets of instruments, which the spread contains, includes only one instrument each. The simplest strategy of pairs trading is as follows: find the related financial instruments with high correlation, build a spread from them, i.e. take a weighted difference in prices.

**What is weighting for?** When choosing two instruments, even with high correlation they can differ in price, price step, volatility. Weighting in this case is applied to equalize the baskets by these parameters.

* How it works… For example: *Such synthetic instruments will have a high return rate on average price. After that, you can trade the composite instrument the same as the regular instruments, trying to buy low and sell high.

***Futures and FOREX spreads** are very different – you can find a spread to trade for everyone. Here are the main types:

**Calendar spreads**– based on using the same instrument, but with different expiration dates. For example, spread of May and October corn. In practice, a shorter term difference is often used.**Cross-goods spreads**, e.g., gold-silver pair, or turning to a crops pair – corn-wheat. There is a vast variety of such goods pairs, and many even have their own names.**Cross-market spreads**– spreads, comprised of futures for the same base good, but traded on different markets.**FOREX spread**– buying/selling of the specifically select combinations of currencies.

***Index/portfolio arbitration** means a creation of a spread between indices and a basket of instruments, repeating this index. Since the markets have very many different indices, ETFs, and other “combined” instruments, in this area there is a big platform for creativity when changing the compounds of the instruments, their weights, etc.

It is the **Spread Chart **that allows to realize the following strategies in trading.

To open the following module, use:

І. **Spread Chart** hot key button.

ІІ. **Open **menu, **Spread Chart** tab.

The
settings window will open next…

in the following window, the necessary parameters are entered to build a spread graph.

**the following image provides an example of the formula**.*

**Let’s take a look at the settings:**

1) In the** Formula **line – a spread formula is entered, the formula may contain multiplication, division, adding and subtraction signs.

2) In the **Spreаd Type **line – choose one of three types of settings of a spread:

*Tick Based, i.e.*Last Price for each instrument, that the spread contains*Long (Bid Ask Based).*To calculate this spread, the Best Ask price of all instruments with positive coefficient and the Best Bid for all negative coefficients are considered.*Short (Bid Ask Based).*To calculate this spread, the Best Bid price of all instruments with negative coefficients and the Best Ask for all negative coefficients are considered.

3) In the **Calculation Method **line – choose the calculation method:

*Simple*– The current contract prices are used.*By point value.*To calculate the value, the current prices of contracts are used, including their costs.

4) In the **Tick Size** line – setup the tick size:

*Auto.**Custom*(when this option is chosen, a window to enter the data will pop up)

After entering all the data in the
settings window, press the **Apply **button. The spread graph will then open:

*The following graph has various settings and functions, which can be used both via the tools panel functions and via the graph context menu.

Customer support service by UserEcho

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