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Why diversification is important in trading

Whether you’re new to the world of trading or you’ve been dabbling in the markets for a while, you’ll find that building a diverse portfolio can boost your chances of success.
Here’s a look at what diversification means and how you can achieve it.

What is diversification?

Diversification in trading refers to trading across a range of assets at the same time. Rather than putting all of your funds into one particular trade, you’re spreading your investment over a range of different trading methods and currencies. This helps to mitigate risk and tap into potentially lucrative markets.

Why it’s important to diversify

Given the events of the last few years, with the pandemic and Brexit among some of the major influences on the economy, on both a national and global scale, there has been a lot of ups and downs in terms of the economy. This, in turn, has impacted on how the markets move.

Add to that issues that affect stocks, such as supply and production delays, and it makes sense to diversify your trading rather than sticking to one type.

Here, you’re swapping and changing so that your trades aren’t too closely related. If you stick to one or two types of trading, they could lose at the same time, leaving you out of pocket. You reduce the risk of losing out by diversifying your portfolio.

How to diversify

To successfully diversify, look at the range of trading strategies available. There are different types, but it’s worth doing your research to find out what suits the level you’re at. For instance, if you’re relatively new to the markets, you might need to start slowly before diversifying.

When you’re a little more established, you could try mixing up your portfolio with forex, swing trading, or CFDs. Using spread betting, for instance, allows you to diversify your trades. This is because it allows you to speculate without owning the underlying asset that you’re wagering on.

Another area to focus on is currency pairs. When trading forex, be sure to have a range of currency pairs across your portfolio. These should be a mixture of high and low-risk pairs, along with some lesser-known combinations. These minor pairs could lead to a surprising pay-off.

When to trade

As well as diversifying the trading types and pairs, it’s important that you’re aware of the trading timings. Different markets around the world open at different times, so experimenting with markets that open in different time zones could help you avoid falling into a pattern.

How will you diversify your portfolio?