How To Limit Your Trading Risk By Diversification
Limit your trading risk by spreading your at-risk capital across multiple positions. A diversified portfolio is key to mitigating trading risk.
Disclaimer: financial information is not financial advice. This post is for informational purposes only.
Limit your trading risk by spreading your at-risk capital across multiple positions.
A diversified portfolio is key to mitigating trading risk.
For example, if you have a $5,000 trading account, spread your capital across 5 positions of $1,000 each.
Don't lose it all on one trade, manage your risk.
Diversify Your Positions
Common sense trader wisdom dictates that you should never put all of your eggs in one basket, or rather, never put all of your money in one stock.
To simplify diversifying your trading portfolio, consider trading stocks in different sectors and industries.
The idea is that if one sector is performing poorly, a different sector of stocks may be performing better.
For example, if the technology sector is down in price, the healthcare sector may be up in price.
If you open all of your trades in the same sector, and that sector has a down day, then you may lose on all of your trades because the sector underperformed for whatever reason.
Another simple way to diversify your positions is by market capitalization size.
As an example, if you open positions on large cap and small cap stocks, you may mitigate the risk of choosing a size of company that underperforms relative to another.
Conclusion
Don't bet the house on one trade. Only risk what you can live without.
Remember to diversify your investment portfolio, but also your trading portfolio.
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