This video refers to the CMC Markets Platform, formerly known as the Next Generation platform.
What is diversification? While more commonly associated with long-term investing, diversification concepts also have benefits for short-term traders. This session covers economic, corporate, political and other developments that have an impact on different markets.
Diversification is a key strategy for traders, much like it is for long-term investors. However, its benefits extend beyond just long-term investments, and can be just as important for short-term traders. By spreading your trades across multiple markets, you reduce the risk of one market move negatively impacting your entire portfolio. If one trade goes against you, other markets might perform better, potentially offsetting the loss.
Additionally, markets react differently to news and economic events. Some markets may view a particular event favorably, while others may interpret it negatively. Diversifying allows traders to capitalize on these varying responses, helping to create a more balanced approach to market movements.
Another advantage of diversification is that it gives you the opportunity to use your research to identify not just markets you want to be long in, but also markets you may want to avoid or short. This increases your flexibility in adapting to changing market conditions.
Traders have access to a wide range of markets or asset classes. These can be divided into four main groups:
Commodities: These include resources like crude oil, metals, and agricultural products like wheat.
Stock Markets: These encompass individual stocks and indices from global exchanges.
Treasuries: This is the government bond market, a traditional financial asset class.
Foreign Exchange (Forex): This involves trading currencies, such as the US Dollar or Euro.
Each of these markets reacts differently to economic and financial trends, and can be categorized into four groups based on their sensitivity to certain factors:
Interest-Sensitive Markets: These markets, such as financial stocks, utility stocks, and bonds, tend to perform better when interest rates are falling.
Defensive Markets: These assets, such as healthcare stocks, gold, and the US Dollar, are favored during times of risk aversion.
Economically Sensitive Markets: These include stocks of industrial and consumer discretionary companies, as well as commodities like crude oil and copper, which tend to follow the global economic cycle.
Commodity and Capital Spending-Sensitive Markets: These markets, such as technology stocks and resource currencies like the Australian Dollar, are typically affected later in the economic cycle.
Several factors influence market movements, including the economic cycle, political developments, financial risks, and interest rates. Each of these factors impacts different markets in different ways. For example, changes in GDP or employment figures may have varying effects depending on the asset class.
The Portfolio Mixer featured on the CMC Markets Platform helps traders analyse and back-test strategies across multiple asset classes. For instance, you can track and evaluate the performance of instruments like the Euro/US Dollar, West Texas Crude Oil, the US 30 index, and Gold. Using the Portfolio Mixer, you can visualize the performance of these assets over different time periods, such as the past three months.
Over the last three months, you might notice that crude oil has outperformed the other assets, while the Euro/US Dollar has underperformed. By adjusting the weight of each asset in your portfolio, you can potentially improve your strategy. For example, if you had been long on the Euro/US Dollar but switched to shorting it, you would have seen more favorable returns. Similarly, adjusting the position size of assets like gold or crude oil can also impact the overall performance of your portfolio.
The Portfolio Mixer tool allows for flexible portfolio adjustments, giving you the option to increase or decrease the weight of each asset based on your confidence in the trade. This flexibility helps you manage risk and optimize returns, making diversification an even more powerful tool for traders.
Read more about CFD platform features with our platform guides and keep up to date with market news and analysis.
