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Futures spread trading involves buying one contract (going long) and selling another (going short). The objective of spreads is to reduce risk in some form another by confining the parameters that affect the price of the contracts (and therefore the profit/loss of the trade) to only the differences between them. This can help remove external factors which will affect both sides equally (e.g. currency fluctuations in the price the contracts are traded in).

There are a number of different types of Futures spread available, including:

Calendar spreads
Intra-commodity spreads
Inter-market spreads

Trading spreads is generally considered lower-risk than speculation solely on one side of the contract because losses are hedged.

If a Futures trader is more confident of the direction of one side of the spread, they can increase the weight on the side they believe stands a higher chance of success by increasing the ratio (while still managing their risk with some exposure to the opposite side).
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Contributed by: Ralph Windsor

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