Spread Trading is one of the most exciting and profitable methods to trade local and international markets. Whether you’d like to trade stocks, indices, currencies or even commodities, BlackStone Futures offers you the ability to do just that. With just R1,000, I’m going to introduce you to the world of spread trading with shares.
Let’s get to it…
Spread trading in a nutshell
Spread trading (betting) is a where you place a bet on whether you expect a market price to go up or down in value. This geared method, allows you to be exposed to the underlying market at a much cheaper cost.
The ‘spread’ is the difference between the buying and selling price of a share.
The offer priceis where the market maker will sell the position to you. This is where you will look to buy or go long a market.
The bid priceis where the market maker will buy the position from you. This is where you will sell or go short a market.
The difference between the bid and offer price is the spread, where the spread trading company makes its money.
There are two types of spread trading positions.
- You can buy (go long) a market as you expect the price to go up
- You can sell (go short) as you expect a market price to go down
If the market moves in your favour, you’ll make a profit. However, if the market moves against you, you’ll make a loss including the added spread.
With spread trading, you don’t actually own the underlying market (for example a share). This means you don’t have to worry about costs such as, Stamp Duty, Capital Gains Tax, Securities Transfer Tax, VAT and even brokerage.
When you place a spread trade, you’ll put down a margin. This works like a deposit.
Note: This deposit is a tiny fraction of the market’s price. You’ll need to ask your spread trading company what the margin requirements are.
You’ll then decide how much you’d like to risk per 1 cent movement with the market you choose.
The spread bet “stake size” at BlackStone Futures for equities starts at just R0.01 per 1 cent share price movement.
The higher the risk per 1 cent movement you choose, the higher your potential losses and gains are.
Here’s what I mean.
Let’s say you want to place a spread trade on Sasol.
Here are the specifics for the trade…
Entry price: 40,000c (R400)
Stop loss price: 35,000c (R350)
Take profit: 50,000c (R500)
Risk per cent movement: R0.10(In your MT4, this is where it says Volume)
Note:With a R0.10 risk per 1 cent move will give you exposure of 10 shares. The more you risk per 1 cent movement, the more shares you’ll be exposed to and the greater your potential gains or losses will be.
What you would lose in your trade
Between the Entry price of 40,000c and the Stop loss price at 35,000c, the difference is 5,000c (R50.00). Now we can calculate how much money we’ll lose in the trade.
We know that the Risk per cent movement is at R0.10. This means for every 1 cent the Sasol price goes against you, you’ll lose R0.10 (10 cents).
Loss in trade = (Entry price– Stop loss price) X Risk per cent movement
= (40,000c– 35,000c) X R0.10
This means if your Sasol trade hits your stop loss you’ll lose R500.
What you will gain in your spread trade
The same rule applies for if the trade goes in your favourable direction. Every 1 cent the Sasol price goes in your favour, you’ll make R0.10 (10 cents).
Between the Take profit price of 50,000c and the Entry price at 40,000c, the cents difference is 10,000c (R100.00). Now we can calculate how much we would make in the trade.
Gain in trade = (Take profit price– Entry price) X Risk per cent movement
=(50,000c– 40,000c) X R0.10
This means if your Sasol trade hits your take profit level, you’ll gain R1,000.
Choose your Risk per cent on MT4
As we all have different portfolio values, you’ll be able to choose how much you’d like to risk per 1 cent movement.
Maybe you can’t afford to risk R500 per trade and you can only risk R200. Or maybe you’d like to risk R10,000 per trade…
This all depends on your risk per appetite and what you can afford to lose.
On your MT4 platform, you’ll need to adjust the Risk per 1 cent movement (Volume) to R0.01, R0.10, R1.00 or even R10.00.
Choose your Volume on MT4
I like to personally risk a tiny fraction of my portfolio per trade.
In the next article, I’ll show you how to only risk 2% of your portfolio when you spread trade
“Wisdom yields Wealth”
Analyst, BlackStone Futures
High Risk Investment Warning: Trading foreign exchange and/or contracts for difference on margin carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss in excess of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. Before deciding to trade the products offered by BlackStone Futures you should carefully consider your objectives, financial situation, needs and level of experience. You should be aware of all the risks associated with trading on margin. BlackStone Futures provides general advice that does not take into account your objectives, financial situation or needs. The content of this Website must not be construed as personal advice. BlackStone Futures recommends you seek advice from a separate financial advisor. Please take the time to read our Risk Disclosure Notice.