One thing you can always count on is for the market to continue offering trading opportunities. However, as mentioned before, how and when this takes place is outside of our control. This does pose somewhat of a problem if you are choosing to make trading your primary source of income. This dynamic can be “softened” by increasing trading capital. This will ultimately allow you to begin diversifying your trades. This can be highly beneficial, as it lowers your need for a high-accuracy rate.
For example, if you have allocated trading capital to a single trade, you are “held captive” until it performs. In other words, you are not generating any income (profits) while you wait for the trade to perform. However, if you have a larger trading account, you are able to diversify into multiple trades. A smaller account cannot be utilized in such a way, as multiple allocations will render each trade rather powerless, in terms of being able to generate meaningful returns.
This is another reason why the wealthy choose to lower risk, as their portfolios increase. Excessive risk is no longer necessary, and therefore, foolish to seek out. This is where many new traders miss the tree for the woods. After securing a massive altcoin win, they continue trading with the same risk profile, whereas they should begin gearing down, so as to preserve their capital.
Security Through Diversification
Once again, diversification proves to be a viable approach, even within the world of trading, and not only investing. An “all-in” approach requires immediate results. Whereas, “trade diversification” allows for multiple opportunities for success. It always comes down to ensuring that no matter what the market does, you have a winning position. This ultimately requires diversification.
Let’s be clear, an investor is perhaps not necessarily in a situation that requires immediate results. A trader, on the other hand, needs to ensure gains are secured on a consistent basis. This is especially true of a professional trader, looking to earn a stable income.
Additional Exposure In The Form Of Hedging
This is a very important aspect of trading. In a scenario where the entire market turns against your trading ideas, you need to be able to hedge your positions. This is often done by opening contrary short positions. An equal allocation to a short position will ultimately freeze losses. In other words, the gains accrued via the new short position will offset the losses in the long position.
Once a bottom has been realized, the shorts can be closed. This will lock in gains, while the long position goes on to appreciate in value as the market recovers. You do not necessarily need to find the exact bottom in order to protect your positions. Had traders/investors chosen to go short at $30K and proceeded to close those shorts at $20K, they would be in a much better position than those who did not.
Missing the bottom by $3K is inconsequential, as the main objective was achieved: Hedging the initial long position. Provided, $17.6K was indeed the bottom. However, traders can once again open up short positions if the market proceeds to edge lower. Perhaps, in this scenario, a smaller allocation, as the bottom is likely near.
The failure of most traders is often due to the absence of a contingency plan. You need to have counter-trades planned in the event that your thesis fails. We have addressed this before… planning for failure, as well as success. Trading is binary in nature. However, successful trading strategies are multi-faceted.
Hopefully, many were able to capitalize on the recent Doge pump. All the best with your trading ideas and strategies. Practice makes perfect, or as close to it as you are going to get!