Diversification is one of the most powerful tools you have going for you as a trader. Having a good, proven tradeplan on multiple markets will do more for your profitability than just about anything else. The trick is to have tradeplans that are uncorrelated to one another, can be traded without interferring with one another, and that each have its own winning edge in the market. This is one of the main ingredients to success as a trader.
Take today, for example. There were so many forces stacked against us in the markets today; FOMC Statement, Non-Farm Payroll coming up in 2 days, Crude Oil Inventory Release (for Crude Traders) and how about the fact that it is the oficial first dawg day of August. Before the session even started we already knew that we wanted to limit our trading. Most of us either traded with a ‘one and done’ approach or at least, limited our trading to just the first 30 or 60 minutes, depending on one’s own tradeplan.
We have a nice diversified mix of markets in the traderoom. On the futures side, we trade Crude Oil Futures, the Russell eMini and Wheat Futures. These are three great markets, that meet the criteria I listed above. They each have their own tradeplan, they are uncorrelated, they can be traded in a way where they won’t interfere with one another, and they each have their own winning edge in the market. Traders who put today’s session in its proper context and who didn’t try to ‘over achieve,’ and in fact, lowered their expectations by limiting their trading as I just described, ended up with a positive session.
Crude Oil should have been one and done or at least, one should have definitely reduced the number of their trades. With the Crude Inventory Report slated to come out later, CL was a very tight market today. The result was a small loss in that market. I only trade CL the first 30 minutes each day so as to make room for the Russell. Remember, one can’t interfere with the other and I have to call live trades too, so I limit my CL to make room for the TF. My net result on CL was -.16 (-$160) on two tightly contained trades. Not so bad considering that is easily overcome. One of the trades missed profitability by just one tick.
The Russell eMini also traded tight. We had a small loss and a partial winner. The net result was either slightly negative or slightly positive depending on how one traded it. As for me, I was down -1.2 (-$120) with TF or, -.6 per 2 positions.
Enter Wheat Futures. Well, to keep a short story short, Wheat jumped out of the gate with a beautiful +11.75 point trade that lasted about 3 minutes. It then got into a 2nd trade which picked up a couple ticks and we were done in about 7 minutes. Net result was +12.25 points for $612.50.
Diversification wins the day. The net result was +$332.50 with very minimal trading and a tiny time commitment. Sure you have to back out trade costs but isn’t that always the case anyway? This is a very tough week to trade but by keeping our trades contained, that is, taking what the market wanted to give us instead of trying to ‘over achieve,’ we were able to grow our accounts again today.
Each day will be different. Each market dances to its own drummer and needs the time it needs to post its profits. One day CL will hit the home run and the Russell will be marginal. Wheat might even take a loss. Other days, all three will win. Rarely, all three will lose. Definitely though, we will smooth our own ever increasing equity curves by merely being diversified with a great trade method, tradeplans, good trading markets and the discipline and professionalism to stick with the plan, which of course, is what we do each and every day.