Investors and traders use diverse strategies to make profits. There are those investors who believe in holding hundreds of positions while some believe in having a very lean and concentrated portfolio. Investors such as Warren Buffet have positions in hundreds of companies. On the other hand, investors such as Bill Ackman of Pershing Square Capital believes in having a small portfolio which he can easily monitor. There are other traders who believe in having positions in just one asset class. It is possible to make money in all these strategies. However, as a day trader, I believe that having positions in very few asset classes is more beneficial. In this article, I will highlight a few issues about creating a good day trading portfolio.
The first most important thing to decide as a trader is on the asset class to use. There are many types of asset classes to choose from. These classes have different subcategories. For instance, if you decide to trade currencies, there are emerging market currencies such as South African Rand and developed world currencies such as dollar and euro. If you decide to trade commodities, there are agricultural commodities (such as corn and orange juice) and metals (such as gold and silver) to choose from. If you decide to trade equities, you can chose between trading various industries such as technology and mining among others. You can also decide to combine various asset classes. However, in my experience, I believe in trading one or two asset classes. Personally, I started trading currencies (EURUSD) before I started to put more focus on crude oil. The reason I selected crude oil is because it is very simple to understand. If there is increased supply, then the price will come down. If there are geopolitical tensions in the middle-east, then the price will go up. If the demand outweighs the supply, then the price will go up.
So, the first rule of creating a portfolio is to select an asset class that you have a good understanding on. If currencies are your thing, then you should create a portfolio that has various currencies on it. It is also important to conduct a deep correlation analysis for various asset classes that you put in your portfolio. For instance, if you are trading currencies, you can conduct a correlation analysis for EURUSD and GBPJPY. The reason for this is that the currency pair that you decide to use are all interrelated. For instance, if EURUSD pair goes up, chances are that EURGBP will go high because of the strengthening Euro. However, these chances are not guaranteed thus the need for this analysis. In addition, correlation analysis is important if you are trading various asset classes. For instance, if you are trading gold and EURUSD, you need to understand the relationship between the two. Gold and the dollar have a near perfect inverse correlation whereby the price of gold will go down when the dollar strengthens. In creating your portfolio, constantly conduct this analysis. There are websites which provide these analysis too.
Watch your portfolio
A common misconception about diversifying your trades is that it will make you money all the time. The fact is that it is possible to lose money in a diversified account even more than in a single asset. For instance, if you have bought EURUSD and sold GBPJPY, it is possible for the two pairs to go in the same direction. Therefore, in such a situation, you will lose money. You should place stops to limit the amount of money you lose. As I have stated before, trading one asset as a day trader is usually better because you can have a good understanding about it.