On the Internet, the most common definition of risk diversification is the division of capital between different assets, brokers, etc. There is even a division into several types: institutional, instrumental, species, transit and currency. In fact, this term has a much broader concept than simply following the principle of “not putting all eggs in one basket”. And even if many points are obvious, for some reason, it is because of their obviousness that traders ignore them. For information on what types of risk diversification exist, see our review.
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The types of risk diversification are limited only by the imagination of the person and his ability to foresee everything. For example, the political risks of countries whose assets are invested, force majeure, etc. Here are some examples of possible diversification:
- division by assets. The most obvious type of risk diversification. Separation can be not only for different currency pairs or gold, but also in areas of earnings: stocks, deposits, real estate, antiques, entrepreneurship;
- institutional distribution. Here we are talking not only about working with different brokers, but also with various counterparties: investments in Forex, the stock market, banks, mutual funds (trust management), etc .;
- technical diversification. Different platforms differ from each other not only in functionality, but also in speed of work. The same strategy on different platforms works differently, because professional traders work with different platforms simultaneously. It is also worthwhile to provide various access to the Internet in case of its disconnection, different withdrawal options, etc .;
- applied diversification. The distribution of money between different strategies: high-risk and conservative, manual and automatic, short-term and long-term;
- diversification of investment portfolios. Assets may have a direct and inverse correlation. A portfolio with gold and the US dollar will have a minimum yield – when the USD rises, gold generally becomes cheaper. A portfolio with futures for corn and wheat will be more profitable, but also more risky, as these assets become cheaper more often at the same time. But there are exceptions, for which diversification is needed. Create several portfolios with different levels of risk, empirically calculating the share of each asset depending on its volatility.
Applying all these types of risk diversification at the same time is not necessary. Everyone evaluates for himself the degree of risk in accordance with the financial and psychological readiness to accept it. The narrower the portfolio distribution of investments, the greater the likelihood of losing money, but the greater the chance of earning.
Here we have the most obvious types of risk diversification. The task of the trader is to develop his own rules of trading and behavior, abstracting as much as possible from classical terminology. Try to always look one step further and think more volumetricly. And then the world of trading will be at your feet!