The benefits of diversification in your trading portfolio

The concept of diversifying a trading portfolio is often linked to long-term trading and investments. However, this method also holds many benefits for those pursuing short-term forex or CFD trading. The changes caused by economic and political changes and events largely influence all markets, which makes diversification advantageous to long-term investors and short-term traders alike.

The classic concept of not putting all your eggs in one basket is used throughout all trading markets and portfolio strategies. This method of trading a variety of markets protects traders from the risks of one market crashing or turning against you. This provides more opportunities for successful trades with a broader range of trading possibilities.

Accessible markets and asset classes 

Each market experiences news releases, changes and events differently. Some may see one event as positive, while other markets are negatively affected by that same event. Analyzing these varying factors and how markets will be influenced by them allows you to make strategic trades, indicating favorable long and short positions. The first asset class or market consists of commodities such as resources, grains and metals. The second is the stock market, including stocks and indices. The third is treasuries, which is essentially the bond market of the government. The last market is the foreign exchange market, or forex.

These markets can be divided into the following four categories:

• Interest sensitive: This group is affected in the adverse direction of interest rate movement. If the interest rates go up, these areas will go down; if the interest rates go down, they will go up. These areas include financial stocks, utility stocks, treasury bonds and telecommunication stocks.
• Defensives: These areas use risks to attract potential capital. These include risks in stocks such as health care, currencies like the US dollar or Japanese Yen, and metals like gold and silver.
• Economically sensitive: This group shifts according to news and events in the economies of countries around the world. The influential areas for stocks include industrial and consumer companies, news regarding major currencies for the forex market, and commodities like crude oil and wheat.
• Capital spending sensitive: The last group is also commonly known as the late-stage sector because it moves later than the rest of the economic cycle. This includes technology groups, energies and materials in stocks, and resource currencies such as the Australian dollar, Canadian dollar and Swedish Krona.

Each of these groups is influenced by different factors and in different ways, which makes careful analysis and understanding vital for success. Changes in the economy, news and releases, political developments, political threats and interest rates all affect the conditions of the various markets. As a trader, you should include the analysis of these influences and markets as a part of your strategic trading tips.

Developing effective strategies 

Many platforms and brokers offer tools to aid portfolio diversification, such as the Portfolio Mixer with CMC Markets. These allow you to track and monitor how your chosen asset classes and instruments have performed over a certain period of time, along with any potentially influential news or events. You can then use this information to develop your strategies according to graphs and trends.

The key to this strategy is adjusting your portfolio and strategies according to updated information. This provides you with the chance to improve your trades and perform more profitably. The available functions with each platform can be used across multiple markets and instruments to suit your portfolio. By making room for a diverse portfolio, you can adapt to changes and work around risks. Furthermore, these analyses and charts can be set over any time period, which makes it useful and applicable to short-term traders.