The saying, “Don’t put all your eggs in one basket” has long been considered an effective risk management technique. By diversifying the portfolio, the investment amount is spread out among different assets resulting in higher long-term returns for less risk as compared to committing the amount in a single asset.
As obvious as it may seem to appear, a lot of day traders do not consider investing in alternative markets. This is due to either lack of knowledge about the benefits of diversification or fear of applying a day trading strategy on anything other than the stocks.
I believe that it is the fear of the ‘unknown’ that prevents day traders from diversifying their position, since why would anyone limit oneself to stocks alone, given the high risk involved without diversification.
However, most day traders focus on stocks never realizing that they are limiting their chances of earning above-average profits. And when they incur losses, they try to chalk it up to bad luck or crazy markets instead of realizing that it is an unintentional, myopic view about day trading that makes them repeat the process, usually with the same results.
The fact is that there are a lot of markets in which you can effectively gain from applying a day trading strategy. Below are two alternative markets in which day traders could consider investing in to optimize the risk-return profile of the portfolio.
Forex is the most liquid market in the world where the average daily trading volume amounts to more than $5 trillion. Unlike stocks, prices in the Forex market experience great fluctuations presenting lots of opportunities to day traders. When proper strategies are put in place to minimize the risks such as stop-loss-order, trailing stop, minimum leverage, the market offers great opportunities to day traders to maximize their portfolio returns.
Exchange Traded Funds
Another market where day traders could invest is ETFs, or "Exchange Traded Funds". ETF markets represent different industries, commodities, currencies. You can purchase ETFs similar to stocks and gain from price movement in the market. The best thing about these funds is that they can either be held for a long term or bought and sold rapidly to gain from short-term swings in the market.
In conclusion, day traders can benefit from diversifying (investing in different markets) their portfolio. In fact, day trading offers greater flexibility as compared to the traditional buy-and-hold strategy in diversifying the portfolio. A day trader has the option to diversify through charting interval, time horizon, position size, time frame and the market.
As a day trader, your life is centered on making the most of the opportunities that are presented to you every day. By extending day trading to different markets, you can dramatically increase the chances of success and reduce the risk of losses.