Some traders like to trade multiple asset classes at the same time. For example, trader XYZ might trade stocks, currencies, and cryptocurrencies at the same time. They believe that they are diversifying their risk by trading multiple asset classes. I disagree. Trading multiple asset classes leads to mediocre trading performance over the long term. Here’s why.
Focus on one asset class
This advice is especially pertinent to beginner and intermediate traders.
Focus on one asset class.
If you trade currencies, ONLY trade currencies. If you trade stocks, ONLY trade stocks. Don’t trade many different asset classes at the same time.
It’s tempting to jump in and out of asset classes. You might be attracted to whichever market is making the most money right now. But here’s the reality: the Easy Money moves in and out of markets. You will lose a lot of money if you chase the Easy Money among markets.
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For example, a lot of stock market traders jumped on the cryptocurrency bandwagon in late-2017 because “it’s so easy to make money in cryptocurrencies!” Cryptocurrencies crashed a few months later, and most traders who chased the cyptocurrency bandwagon lost a lot of money. They would have been better off by just sticking to stocks.
Long term trading success is more important than short term term trading success. You must focus on one asset class if you want to achieve exceptional long term returns.
Why is GE failing? Because a conglomerate business model does not suit the 21st century. Competition is much fiercer today than it was 20 years ago, and only those who specialize can succeed.
This is true in trading just as it is in business. It was easy to make money from trading before the 1990s. Information flowed at a much slower rate, and professionals with more information could easily outperform the average trader who was at an information disadvantage. The internet has destroyed these easy information advantages. Everyone knows technical analysis nowadays. The most successful modern day investors and hedge funds focus on one or two asset classes.
There is no one-size-fits-all strategy for trading all markets. This is because every asset class is driven by different fundamentals. For example, the stock market is driven by the economy and corporate earnings. Currency pairs are driven by money flow. Commodities are driven by demand and supply for raw materials.
How can you expect to outperform the average trader if you don’t specialize? I believe in working smart and working hard. In order to beat the average trader, you must have more knowledge about a specific market than the average trader.
We all have just 24 hours in a day. If you spread your time among 5 different asset classes, you will not know as much about a specific market as a trader who solely specializes in that market.
- Let’s assume that Trader A trades 5 different assets (stocks, bonds, currencies, commodities, and cryptocurrencies) while Trader B only trades 1 market (stocks).
- Both traders spent 12 hours a day trading.
- Trader A spends 2.4 hours on the stock market. Trader B spends 12 hours on the stock market.
- Who do you think will know more about the stock market? Who do you think will be a better stock market trader?
Now imagine the same thing for the other 4 markets. Trader A will know less about each of those 4 markets than individual traders who specialize in each of those 4 markets.
In other words, Trader A does not have an edge in any market! He cannot outperform the average trader in any of those markets. Hence, he is nothing more than an average trader and his overall performance will be mediocre.
Different strategies work better in different markets.
- For example, fundamentals work the best in the stock market. Technical analysis isn’t as effective in the stock market.
- Technical analysis works best in the currency markets.
Focus on one strategy to maximize long term returns. Your performance might be more volatile if you focus on one strategy. There will be times when you underperform diversified traders. But you will outperform over the long run.