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Combination Trades: How to Use Them in London?

Combination Trades: How to Use Them in London?

A combination trade is also known as a spread trade. It consists of two or more trades opened simultaneously to reduce exposure to single price risk.

The basic principle is that you buy one asset and simultaneously sell another identical asset, which exposes you to a negative correlation between both assets, theoretically minimizing your exposure to market volatility. It is advantageous for investors looking for reliable returns without exposure to high levels of risk.

How to Use Combination Trades

You can use this tool in London by using the following steps:

Step 1

Identify under/overvalued stocks.

Step 2

Enter into an equal position on X number of shares representing desired exposure, e.g. if you want 10% exposure, enter into order on 10 % of the share count.

Step 3

Sell a matching number of under/overvalued stocks to represent a neutral position.

Step 4

Monitor both positions, and when one is going up in value, the other is going down in value or vice versa; you will have broken even or have made a profit depending on which side has moved most.

For example, if you buy gold shares expecting them to rise, but at the same time you sell silver shares expecting them to fall, then any price movement that differs from your expectations will reduce or increase your exposure. In this example, if the gold price rose by 10% and silver fell by 10%, then your initial combined position would show no change. At the same time, a 5% rise in gold and a 5% decline in silver would leave your initial combined position up by 1.5 %.

In this case, you have bought an asset and sold another identical one to ensure that if either goes in the direction you want, it will cancel out the other. Any movement in different directions will be compensated for. If both assets go in opposite directions, it becomes a negative correlation and increases your exposure to price movements in both directions.

Types of Combination Trades

The types of combination trades that traders may use include:

Multiple Assets

When a trader uses more than one financial instrument to create a portfolio and generate higher returns than if they only used one, commodities such as gold and silver tend to move in the same direction but at different speeds. It is because one will often lead the other, like the commodity of silver usually leads gold (silver tends to react faster to changes in the global economy).

Combining Different Strategies

A trader could combine both technical analysis and fundamental analysis by looking at two or more graphs for each situation before deciding. This is because they are both trying to predict future market movements, and therefore combining them can help you make better decisions when trading.

Using Different Types of Orders

An example would be using a stop-loss order with a limit order when closing the trade. By doing this, you are cutting your losses early if something goes wrong with your position or the market drops dramatically. When combined, these two strategies will reduce the amount of risk associated with your position.

Combining Different Timeframes

Traders use multiple timeframes to determine whether an asset has momentum or not (when it starts trending up/down). For example, by looking at a 1-day timeframe with multiple indicators plotted on it and then looking at 1-week and 1-month timeframes. This will enable the asset manager to assess better whether an asset is trending up or down. These strategies can work well to help traders pick winning trades if combined.

Finally

Combination trading can be a helpful strategy, but it should not be underestimated because it increases the risk associated with each trade you make, potentially reducing your profits if you do not understand what you are doing. New traders who want to trade options should use a reputable online broker from Saxo Bank.

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