Diversification is the cornerstone of successful prop trading. It allows you to not only mitigate risks but also tap into emerging opportunities. Whether you are a seasoned trader or just secured your first prop funding, here are five best practices you should follow to build a diversified portfolio.
1. Diversify Assets
First things first, don’t put all your capital on one asset class. Markets are predictable, and the only way to protect yourself is to diversify across numerous asset classes, such as stocks, bonds, real estate, commodities, and crypto. Take some time to study how each asset class reacts to economic conditions. For instance, commodities like gold often rise during uncertainty, while stocks thrive when the economy is booming. Cryptocurrencies are known for offering short-term gains. Consider your prop firm’s risk management guidelines to diversify assets.
2. Blend Strategies
One of the best ways to maximize your profit percentage is to use a variety of trading strategies. Some common trading strategies include merger arbitrage, index arbitrage, trend trading, mean reversion, swing trading, scalp trading, and global macro-trading. Some trading strategies are passive, others are more hands-on. With multiple strategies, you can distribute the psychological load and prevent burnout.
3. Partner with Multiple Firms
Diversification is not limited to asset classes or trading strategies. It also applies to the proprietary firms you work with. Working with multiple firms can help you benefit from varied funding models and profit structures. Other benefits of partnering with multiple prop trading firms include increased scaling potential and flexibility to test different trading strategies. When trading with a prop firm, there is protection against technical downtime. Using multiple firms also reduces risk of losing your funding account if one firm imposes unfavorable terms.
4. Rebalance Often
The fast-paced nature of prop trading will keep you on your toes. A position that made sense a week ago might now expose you to considerable risks. This is where rebalancing comes in. It is the process of adjusting your investment portfolio to maintain its original asset location over time. While there are several rebalancing strategies, the bottom line is selling assets that have performed well and buying the ones that have underperformed. Think of rebalancing as trimming oversized positions, protecting you from sudden market changes.
5. Stay Updated
Trading is heavily affected by economic indicators and geopolitical events, and prop trading is no different. Keep a keen eye on changing market conditions, corporate news, and government regulations to understand which asset classes might perform better and which might be at risk. You can also take proactive decisions and capitalize on once-in-a-lifetime opportunities.
Conclusion
When markets shift, a diversified trading portfolio acts as a shield. It makes sure your capital and efforts do not go down the drain. It also impacts your chances of scalability and future funding from a prop firm. By diversifying assets and blending strategies, you can ensure both short-term and long-term gains. Moreover, rebalancing your portfolio and staying on top of economic and geopolitical news can help you take proactive measures, ensuring diversification to the fullest.
