Should you diversify when trading?
I feel like the word “Diversify” may be over-rated. In some circles, they trade commodities. In other circles, they trade cryptos, and in my circle, we trade Forex.
Which should you trade? Should trade you trade all of them? I don’t recommend it. It’s never as simple as ABC or 123 when it comes to trading.
Trading more markets doesn’t automatically mean more profit, which I think needs to be considered by newbies.
People always suggest diversifying as a way to minimize risk. Always. But for the unskilled, sitting on your hands/cash is your best bet.
Diversifying is how people that are skilled in trading markets reduce risk. To diversify, you need to be able to actually trade the markets you are diversifying into.
Warren Buffet is also known for saying something like “risk comes from not knowing what you’re doing.” I may be getting wrong, but it’s along those.
The only people that need to diversify are people who don’t know what to do with their money. Skilled traders know how to reduce risk and still chase returns in their chosen markets.
That’s why you probably won’t find many traders who first become successful by trading a whole bunch of things.
Most of them became skilled first in a particular market and then maybe decided to move onto other markets to learn how to trade those.
Having said that, however, it’s never wise to start off by diversifying in TRADING. Because you are consciously trying to learn the skill of trading.
It’s way better to start off by concentrating your efforts on one market, and it doesn’t matter which. Just pick one. Start studying that market and all its rules and characteristics.
There are some exceptions you may have come across when surfing YouTube or Instagram or wherever you get your trading information.
When FX traders technically “diversify” by trading FX pairs along with GOLD, for instance. Gold is a commodity, but many FX traders will trade this instrument because it moves similarly to a currency pair.
So it’s much easier to start trading something like gold instead of oil, for example. But both are commodities. But gold prices move more predictably than oil does.
Other popular instruments these days are the US30 and Nasdaq100 among FX traders.
Many traders trade both currency pairs and these INDICES (which are basically stocks meant to represent a bundle of companies), and some people might prefer trading these on brokers that are mostly stock-focused, like Plus 500.
If you are trying to invest your money without learning many new skills in the process, Diversify! Diversify! Diversify!
That will always be your best bet if you want to sit back and invest VERY long-term without having any knowledge about anything.
But here! We trade, baby. We get comfortable with risk and managing it appropriately. If you’re in this, trying to learn the skill of trading financial markets, you want to start somewhere and get familiar with one market at a time.
Getting involved in markets, you have no business getting involved in will end very painfully. It will actually increase your risk!
Diversifying at the beginning will achieve the completely opposite result you’re looking for if you are trying to learn how to day trade.
I have an article written on this website on How Many Pairs to Trade that should really send home the message that LESS IS MORE in day trading.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.