Risk Diversification for Retail CFD Traders

As traders, we generally look at popular investors who managed to generate consistent returns over a long period of time. Even though the information they provide is surely appropriate for some investors, it may not be the case in every situation. In particular, risk diversification is one of the most debated issues and if you are a CFD trader, we’ll clarify a few things in our current article.

Building a portfolio?

Investors generally build a portfolio of assets and hold their position in the long run, adjusting them or hedging the risk each time an unexpected event occurs. That methodology is hard to apply for CFD trading, because of the overnight swap charged every single day. If you’re trading contracts with a positive swap, it can be done, must most of the time your broker will charge you the swap each day.

This means day trading and swing trading are the most suitable for CFD trading, making the investors’ diversification method inappropriate. You can’t build a long-term portfolio with CFDs, but instead, you can trade multiple assets in order to have broad risk exposure.

How many assets to trade?

And we reach our second point, related to the number of assets one should trade. The answer is different, depending on each trader’s experience. If you are a beginner, you should ideally stick to a single instrument and as you start to have results, gradually increase the number of assets. For experienced traders, monitoring more than 10-15 assets could turn out to be overwhelming.

Our advice is to focus on a shortlist of instruments and constantly trade them, no matter what happens with the market. The reason is very simple: each instrument is unique, and the price is influenced by a different set of variables. As you get accustomed to them, it will be easier to spot trading opportunities.

Different trading strategies

Do you trade breakout strategies, short squeeze situations, false breakouts, use indicators like MACD or moving averages? Most of the traders use more than one strategy and that could have both positive and negative influences. On one side, different trading ideas will provide trade diversification, but on the other, it will be harder to analyze and monitor the risk.

You should study your trading analytics for each trading strategy individually, in order to see how each performs over a given period.  It gets even harder when you have different strategies and plenty of instruments, the main reason why we advise to focus on a shortlist of trading instruments.

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