InvestorQ : I understand for investors; but should traders diversify too?
Juvina Maggie made post

I understand for investors; but should traders diversify too?

Deepa Salunkhe answered.
3 years ago

Surprisingly, traders also need to diversify the risk. This is an interesting debate! Most of us understand the importance of diversification in case of investors. When you are betting on a story you must ensure that you do not ignore the downside risk of your bet. Hence you need to spread your bets. But, what about traders! Interestingly, the concept of diversification is as relevant to traders as it is to investors. A trader assumes short term positions and as a prudent measure he needs to ensure that all his short term positions are not concentrated on one story. For example, long on Hero Moto Futures, long on Rallis call and short on Tata Chemicals put is also not a great idea as the entire structure of trade is betting too much on a revival in rural demand. If that does not happen, then there could be losses on all three trades. Diversification is as critical for traders as it is for investors. In fact, for traders it is all the more important as their primary focus is on protection of their trading capital. Traders have a much shorter time frame and hence they also have a smaller window to manage the risk or take corrective action. Remember that the beauty of diversification in asset allocation is that it is as close to enjoying a free lunch as you can ever get.