Monday, May 26, 2008

Focus On A Few And Not "Diversify"

Many successful full time, professional traders engage entire days on one or two stocks or futures exclusively. No matter how little of an edge this practice offers, learning traders should grasp and take up whatever is available.

Floor Traders

On the exchange floors, the same traders engage in the same security day in and day out. This means that over time, their behavior could display patterns and therefore exploited by the retail trader who spends all his/her time on the associated stock or future.

Reduced Transaction Costs

This should be obvious. Operating a successful business requires expenses to remain at the absolute minimum, and so does trading on a professional level.

Reduced Mistakes

Everybody makes mistakes, and they cost money, at least in the amount of transaction fees. Volatility measure errors, fat finger mistakes like buying instead of shorting or keying in the wrong order volume become rare once the trader becomes familiar with the security.

Diversification Is Obsolete

The permanently optimistic analysts on TV or radio still scream about the well aged concept of diversification. The whole idea was created by an academic, not a professional security trader, decades ago. The highly correlated environment today, along with the credit contraction have created risks that were entirely overseen or intentionally ignored to deceive the public.

Either way, logical, profitable solutions always lie within something that the masses do not realize or engage in. At this moment, majority of the publicly uninformed still embrace the concept of “diversified portfolios” to reduce risk; didn’t turn out that way though for the past year, did it?

0 Reflections: