Thursday, June 5, 2008

Diversifying your portfolio

Diversifying your portfolio can be a very effective way to trade in the stock market. It can help you spread your money over many different opportunities that can help increase your chances of success. It will also help with risk management. By not having all of your account into 1 trade you will be less affected if that trade does not turn out the way you want it to.

The thing that most people do not think about with diversification is diversifying with both long and short positions. Many traders hate bears, and sideways markets. They are a strict bull. But in order for them to be well diversified as traders they should have at least some sort of bearish trades going on even while they have bullish trades.

The reason behind this is that you are protected from surprises in the market. If the market crashes your Bullish positions will probably get crushed but your bearish positions will be doing wonderfully and hopefully more than make up for the losses you took on the long side.

If the market’s rally the same thing is true. You can make tons of money on the long side while your short positions are getting hurt. This helps you make money no matter which way the markets may be heading.

This strategy is especially important during sideways markets. In these environments stocks can head up 100 points one day and crash 200 the next. If you were diversified between long and short positions you can make money no matter what happens in the market.

Another thing you should look at is trading more towards the side of the market. In other words if the markets are extremely bullish you should probably have more bullish trades then bearish open. If they are bearish you should have more bearish trades’ then bullish open.
Of course you still have to develop long and short trading systems that work. If your short term trades are not working now then they probably will not work if you do diversify.

For more information on trading in the stock market visit

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