Doing different things is a very ambiguous concept in my opinion. At its core is a brilliant idea of increasing the security of one’s actions. Applied to financial markets in a crude form, it looks like this: let’s choose several good instruments at once, then the likelihood of an unfavorable outcome will sharply decrease because even if one or two become unprofitable, the others will still generate profit, and as a result, we will be in the positive.
In simpler terms, don’t put all your eggs in one basket. This can be countered with the proverb “To chase two rabbits and catch none.” It’s important to understand how diversification works. Let’s delve into it.
NAIVE DIVERSIFICATION
There is a concept in the English language. Simply put, it’s an example of what not to do. You just gather a variety of goods in the hope that they will all grow, as they can’t all depreciate at once. It sounds logical, but the market doesn’t follow logic. A lot will depend on simple luck. However, if you consider this approach for the long term, it will likely lead to losses. Actions should still be deliberate and logical. For this, your diversification should be either vertical or horizontal.
VERTICAL DIVERSIFICATION
Vertical diversification covers one industry from bottom to top, including competitors producing a specific product, and its components, and attempts to gain control over the markets for the chosen product. The goal of such diversification is to monopolize a specific type of activity.
HORIZONTAL DIVERSIFICATION
On the contrary, horizontal diversification combines activities that are related to items that are absolutely unrelated to each other but, according to analysts, cannot be done without. For example, something related to the food industry and something related to semiconductor production. Of course, a sophisticated mind will build a chain of how one is connected to the other and similarly prove that wheat and barley production are completely independent products. It all depends on the logic used to justify these actions at a given moment.
CONCLUSION
Diversification is a very complex approach. For me, one thing is obvious: to engage in multiple instruments simultaneously, you need to know each of them perfectly. Therefore, at the moment, there is nothing about diversification in my trading program, except for this definition. The decision always remains with you.
