Many people overlook the importance of keeping a balance between long and short positions in their trading account at the same time.
This strategy can be very important for a few reasons. First of all, the markets can have big swings from time to time. It is not uncommon for the stock market to have a series of bullish days and all of a sudden have a giant 1 day pull back or reversal.
This makes it hard for anyone to know exactly what will happen in the markets in the future, even professionals. By having both long and short positions open at the same time you are less affected by the sudden surprises of the market.
This way a pullback will not completely destroy your account. While you may lose money on your bullish position you could gain money on your bearish positions.
This strategy can be even more important to option buyers. If your portfolio consist of nothing but calls and the market pulls back huge in 1 day you could lose half your account that day. If you had a few puts they could be doubling that same day, making up for some of your losses or even making you a profit.
Now in most cases, you probably do not want to diversify your portfolio 1 to 1. That’s 1 bullish trade for every 1 bearish trade. This is because the market does have larger swings. There are bulls markets and bears markets.
If the market is consistently going up every day be more bullish. Maybe have 80% of your account in bullish positions and only 20% in bearish. On the other hand if the markets are going down you may want to have more bearish trades then bullish.
But keeping your portfolio mixed can be a great way to help you from experiencing sudden large loses here and there.
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