Investing

How to Minimize Loss in Online Stock Trading Through Spread Orders?

high-gain-forex-trading-systemWhile investing in futures, most of the investors focus on the money they want to gain, not the amount they might lose. Spread order is a strategy to hedge positions while paying attention to the expected losses in online stock trading.

Share trading is a really risky investment option. So much so that even expert traders make every move very carefully to prevent big losses. There have been cases where experts have also suffered huge losses even after playing very safe. The reason behind is that most of the traders lay whole emphasis on the money invested and return expected from it.

But what the veteran players do differently in online stock trading or in futures trading is to focus more on the money at risk than profits. In short, the money at risk is the center of their trading strategy while picking any share.

Spread order is one of the strategies online traders use to hedge positions and minimize their risk. This technique is really helpful when stop loss does not prove to be effective and traders need some other strategy to minimize the risk.

What is spread order and how it works?

Spread order is basically investment through futures and options, where you buy/sell shares of the same company for different months to hedge against the risk associated with market fluctuations. Traders do this to balance out the market fluctuations of two months to minimize the risk. This can also be called a combination of orders made for single trading strategy. Those involved in online stock trading in India can create spread orders of same or multiple underlying with combination of futures, options or stock spreads.

Let's say the NIFTY futures in December are trading at 7800 and expectations for January are 7860. Now even if the market moves up by 30 points, you will be able to minimize the loss and get benefited from the 30 points difference in futures. The simple way is to sell January futures at 7860 and buy December futures at 7800.

How to place order?

Before this, you need to have prior knowledge of different types of spread orders, which are:
• SP or Calendar Spread
• 2L or two-legged spread
• 3L or three-legged spread

SP Calendar Spread: It includes two positions: one with near expiry and second with a far off expiry. To choose calendar spread order click on the drop down list at the bottom of the order placement window. In this you sell NIFTY futures for the first position and buy the same for the second position with long time gap. This helps you hedge the risk by making profit on the second option if the first predictions fail.

2L Spread: This is usually preferred by the traders to gain from correlated market. Traders opting for 2L spread orders either move from one month's futures contract to the next month or just place a order to gain concurrently from tow interrelated contracts.

The point to remember in 2L spread is that these are IOC (Immediate or Cancer) orders, which means your order gets canceled immediately if not executed. You can also get benefitted from two different stocks. For instance you think that ABC is going to drop but at the same time XYZ is going to improve. So, you can hedge the risk associated with ABC by placing a 2L spread order to Short ABC and buy XYZ at the same time.

3L Spread: This as the name suggests "three-legged order" allow you to place 3 orders simultaneously. This is helpful in extremely low volatile market. This is called butterfly strategy to effectively cope with the volatile stock market.

Conclusion:

Spread orders might sound a bit complicated for the first time, but these are really beneficial to make profits in highly volatile stock market. The best share broker can gives complete access to spread order placement on their online trading portals, with the guidelines to place the order.

by myvaluetrade.com

A post by Anuj Sharma (4 Posts)

Anuj Sharma is author at LeraBlog. The author's views are entirely his/her own and may not reflect the views and opinions of LeraBlog staff.

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