December 09, 2005 at 9:17 am | | Comments 7

Diversification for Traders

They send me junk all the time, as if I really care.

Those long-term accounts of mine are magnets for the endless supply of “investment” idea brochures and write-ups.

It’s all about diversification, they say.

But I’m a trader! Can I still diversify? YES, and I should. But it isn’t the same. It’s not about finding some international exposure to offset the large cap growth in my portfolio (did I just say “portfolio?”). No, diversification in my world as a trader is entirely different.

I can diversify my timeframes. I may choose to day trade some of my funds, looking for quick intraday moves while I let a swing trading position play out over the course of a few days. I can diversify my timeframes by checking not just the 3-minute chart but also noticing what the 15 or 60-minute charts show. That’s something that can help me as a trader when I am trying to determine my next course of action (or inaction).

I can diversify the sectors I trade. Maybe I trade semiconductors on a day like today when they’re the talk of the NAZ, and other days I turn to the homebuilders or the energy stocks for movement. The bird flu plays have been active in recent weeks, and they move to the beat of their own drummer. Diversifying sectors allows me to find exposure in places that will move with the market or not at all, which it helps to stay aware of on trend days as well as range bound days.

I can diversify my trading by going long or short. It cracks me up when people I know see the DJIA down 80 points and think I must have lost money. They forget I’m a trader. It’s about movement, not always price appreciation. I can go long or I can short sell and still make money as long as I’m paying attention to the market.

Diversify your timeframes, the sectors you trade, and be willing to go short. And when you get a chance, trash that value fund prospectus!

Jeff White
President, The Stock Bandit, Inc.