Trading Portfolio Diversification

My substantial trades have only been on Nifty F&O based on Nifty spot. Unless liquidity becomes an issue I plan to stick with Nifty F&O. I realised along my trading journey two things

  • One entity is enough to make money from the market. If more need to be made only the position size needs to be increased.

  • When the mind is zoned in on the one that is when it performs the best.

How about you ?

  • Trade a selected basket of instruments
  • Trade only one instrument
  • Trade anything that moves

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Trading Portfolio diversification is a widely debated topic and very important one here is what my thinking on the same:-

  • You want to trade in one instrument or many also will depend on the kind of system you use lets say you are using a system that has edge in one type of market situation and if that situation is not there and you dont trade that’s perfectly fine.

  • You dont want to wait your edge to appear on one market , you dont have that paitence then you might look for the edge in other instruments, there is no harm in that but T&c applied - Your R/R will change with instrument so your risk managment rules should also change with that.

Now for positional trend following why it is so important to have a diversification can be understood by a simple fact that any instrument can go in range bound scenario for a long periods of time where trend following will be very painful but in same time if any other instrument is in strong trend why will you miss such opportunity?

For trend following its only the price movement that matters be it any market any instrument so your mind can focus on one system and how to execute with perfection and forget everything else- That’s how you can trade in the zone

When starting out I think its best to trade everything that moves with whatever excuse of a capital one has. You don’t know what you don’t know and will trade everything poorly, so might as well learn the ropes of everything and get a feel of how everything comes together. The only objectives here being to trade as much as you can and not go bust.

When the ropes are learnt its best to stick to anything you found your trader-market fit in and keep trading it until you don’t have to think about it too much and and your most of your trading almost happens in autopilot. This is a decade(s) long phase.

And then unlocks the final phase, trading everything that moves again but this time with the accumulated experience and understanding of what you don’t know and having a tested risk management system in place.

Working as a professional trader in a fund or a bank helps accelerate all three phases. An amateur/solo trader would most likely never survive this entire process due to one limitation or the other and that’s perfectly fine.

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Trading different systems can reduce your overall risk a lot vs trading single system. Best to test it yourself. I underestimated this, but now instead of putting more effort in improving scalability of my main system i will add couple of new systems.

Since you seem to be mechanical trader, once your main system is set, there is no harm in looking at other things and check how they combine with your system.
Obv, future can be different - so rather than increasing risk due to lower DD of combination, just enjoy the lower risk.

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I have a list of stocks that I am familiar with and only trade with those. I think that is the best way to get up and running.

The choice of instrument to trade is an important one. As a trend follower its important that the instrument is likely to trend rather than stay side ways or volatile for a long period of time. This is why Nifty is a good candidate for trend following. As you can see from the pic here posted on Zconnect Indian markets are on a long term uptrend. But there will always be events to pull it down. Am positively sure that barring any catastrophic events, India will regain its lost glory from the darkness of its colonial past. There was a time when India was called “the sink of the world’s gold!” (Pliny the Elder, in 77 CE) which lasted till the point it was looted away. In the process Nifty is going to trend and trend well enough to make money for me and my fellow traders. Only problem is that as position size increase we may have to worry about liquidity issues, order size limits etc.

On a side note Correlated instrument go up and down together. So if we make loss we make loss on everything. Uncorrelated instruments there is every chance that when one makes profit the other makes a loss. So it affects overall profitability. Hence my conclusion that Nifty should suffice until I see something that contradicts the hypothesis.