Monday, November 21, 2011

How Traders Can Diversify too

By Timmy Morre

One of the most common free stock tips that we have all been told at one point or another is to diversify. For an investor this is easier said than done, you just need to buy a bunch of stocks and hold onto them for the long term. This way if one stock goes down and you have 25 other stocks you are still ok.

But for traders who are in the market for only in the market for a short period of time do you still need to diversify? And how would you go about it?

It is important to diversify a little bit. If you are trading and lose your money on a series of bad trades it can really add up and put a big dent in your account were money used to be. If you plan on trading profitably then diversification can help you get through the hard times. Here are some ways to diversify a little.

1. Having Multiple Trading Positions Open At The Same Time

There are plenty of traders out there who will have 5+ positions open at any given time. That way if one trade does under they can still make it up on another trade.

2. Keep Losses Small

The idea behind keeping your losses small is that they will be small compared to your wins. If you lose $1 for every $2 that you make and you have 2 trades open, one long and one short and the market goes up you will lose money on your short position, but make money on your long position. This also works the other way around.

3. Learn To Play The Downside

Learning how to Short a Stock is pretty important when it comes to stock trading. The shorter the time frame you are in the market the more important it is to be able to make money in both up and down markets. If you could only make money in bullish markets what would you have done during the crash of 2008?

With short term trading you are a lot more susceptible to what happens in the short term. Since you can never be right 100% of the time holding both long and short positions at the same time can be a great way to protect yourself against sudden changes in the direction of the market.

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