Diversification is very important in the stock trading business. If you want to make your life better, you should follow the famous investor Warren Buffet’s advice. According to his statement, no investors should put all their eggs in the same basket. This means, it wise not to invest all your money in the same stock. If the stock crashes for some reason, you are going to lose all your investment. That’s, why you need to diversify your stock trading portfolio to make your trading career easier.
So, what is diversification?
In the stock trading business, diversification simply means, to mitigate the risk by investing your money in different stocks. Though it might seem an easy task do, it is one of the most complex tasks in the trading business. Most rookie traders tend to overtrade the market while diversifying their portfolios. Let’s learn some key steps which will help us to mitigate the risk factor in our trading career.
Develop a robust strategy
You should create a robust trading strategy which will allow you to trade the market in the different trading instrument. A trader should never create a trading method that can find trades only in a certain asset. The strategy should be dynamic and it must have the potential to analyze any market condition. It might take a while to develop such a unique trading method but once you develop such a trading method, you will be able to take trades in different trading instruments.
Trade with a good broker
To diversify your stock trading portfolio, you must trade with a good broker. A high-end broker will always provide you access to different trading instruments and thus you will be able to take more trades. Browse this site and learn more about the offered trading instrument at Saxo. Once you see the long list of assets at Saxo, you will become more confident about your actions. You will get the chance to analyze more trading instruments thus making a profit in this market will be much easier.
Control your trade frequency
Diversification doesn’t mean you will start overtrading the market. The overall risk exposure should never exceed 2% of your account balance. If it does, you may consider yourself an aggressive trader. Try not to have more than 3 running trades at the same time. The cumulative risk exposure for the 3 trades should never exceed 3% of your account balance. If it does, you are just overtrading the market.
Develop fixed sets of rules so that you don’t become emotional while taking the trades. Once you start maintaining the rules at trading, you will become more organized with your actions and thus you will earn more money.
Learn risk management policy
Knowing the importance of risk management policy is vital to the portfolio diversification process. Since you will be having more than 2 running trades in the market, you have to reevaluate the risk factor in each trade. For instance, if you open three trades with 2% risk in each of them, you are taking a 6% risk. This simply violates the basic rules of the stock trading business.
Though the risk exposure level greatly depends on the trader’s skill, still we recommend the novice traders not risk more than 3% of their account balance. Follow this simple rule for the first three years and it will help you to improve your discipline.
Trade with long term goals
Stock traders should never trade with short-term goals. If the trades are taken based on short-term goals, the traders have to continuously look for the next potential trade signals. Thus the overall trading process will become much harder and the traders will fail to diversify their portfolio systematically. Create your goals in such a way so that you can earn a decent amount of money without thinking about the next trade. One good trade should be enough to secure a decent profit.