Trading a few instruments Vs a large portfolio of instruments

[gmst]

Discuss which is better and why:

Trade a few instruments
Pros:

• 
  ->Chance to develop in-depth market dynamics of one instrument very well
  ->Chance to develop good tape reading skills
  ->Chance to understand the cumulative effects of participants on that market
  ->You get to know intimately effect of news on that market

Cons:

• 
  ->Much harder to become consistent.
  ->Having 4 or more losing months in a year is common.
  ->Can't diversify risk (if you are trading index like ES, then it doesn't apply strictly)
  ->Your particular market can go through lean phase. How will you make money then?

Trade a Large Portfolio
Pros:

• 
  ->Diversified risk
  ->Less stress since you make money almost every month
  ->Not dependent on a particular market's current trading conditions

Cons:

• 
  ->Partial/Full Automation is must
  ->Could lead to fat finger mistakes in Partial automation
  ->You tend to trade statistically. So far so good. But you never learn intricacies of a particular market
  ->Possibly weak intuition feeling compared to trading only a few symbols.

 

[gmst]

This topic might seem like a no-brainer and ETers might vote for trading a portfolio. However it is not that simple a decision.

Historically, people have focused on trading single or a few markets. Examples: pit traders used to trade only 1 product. In banks as well, people trade a only a small number of products. Some will be trading 3 or 4 fx pairs or some might trade 10 fx pairs. Some might trade only bonds etc.

However, with the technological progress, it is also possible to run a huge book of 100-500 stocks. CTAs have for years traded 20-50-100 futures in a large portfolio.

So, question is which one is a better approach and why, especially for individual traders?

 

[NetTecture]

Quote from gmst:

This topic might seem like a no-brainer and ETers might vote for trading a portfolio. However it is not that simple a decision.

Historically, people have focused on trading single or a few markets. Examples: pit traders used to trade only 1 product. In banks as well, people trade a only a small number of products. Some will be trading 3 or 4 fx pairs or some might trade 10 fx pairs. Some might trade only bonds etc.

However, with the technological progress, it is also possible to run a huge book of 100-500 stocks. CTAs have for years traded 20-50-100 futures in a large portfolio.

So, question is which one is a better approach and why, especially for individual traders?

It depends on timeframe and automation level.

Daily swing trades? You can do 50 charts in an evening doing discretionary trading by rules with modern charting.

Intraday? Unless you are automated, 6 will be taxing (depending on timeframe). Automated? No limit.

There are a LOT of specific variables in here.

 

[oldtime]

I made all my money, trading just one symbol, ES.

When they invented YM I experimented a little but it added nothing.

Thank G-d I don't have to go back to those days. It's a rough way to make a living and a very brutal life. Everyday you live or die by ES.

I guess there were some good days, but the only ones I remember were the ones that took me to the brink of extinction.

Now I just trade 4 forex pairs for fun and profit. I would describe it more as a hobby rather than a career. I make enough off those 4 pairs to pay my small monthly bills.

but to answer your question, no, I would never want to go back to trading just one instrument. I did my stint there, and got lucky, everything I have on is spread.

even in my conservative non trading investments I try to keep it spread 50/50 stocks vs bonds

I hear ya, you want to specialize and get good at just one thing and know more about it than anybody. It worked out for me, but it took 1 week off my life expectency for evey 1k I made, and all those years trading ES were lost years

no, I would never go back to that

although forex isn't much better, 24/5, you can't buy a Chinese T shirt at Wal mart without me thinking about it

The stock market is up a 100 points and everybody is happy, and there I am in the corner worrying that my dollar has just gone down

yeah, no, keep yourself spread, that's how most of the successful people that are still alive do it

when you get to talking to them, they own a farm, they own a restaurant, they own a car dealership. one of them is always taking it in the shorts, and one of them is doing pretty good.

 

[baggerlord]

Depends on your strategy. What is your edge?

 

[oldtime]

Quote from baggerlord:

Depends on your strategy. What is your edge?

just do what everybody else is doing and hope they are smarter than you

that's an edge

almost nobody does it

 

[mark_mm]

The argument for trading one instrument, because you can get to know how it moves and master it seem bogus to me, especially on an instrument that is highly liquid.

Think of of trading like trying to capture water from rain in a bowl. Trading one instrument is staying in one place watching waiting for it to rain or trying to predict when it will start.

Trading a basket you can scan for the places where it is has been raining hard in the last 20 mins and go there on the assumption it will continue for a while (momentum).

Although this analogy is rather crude and just highlights one aspect of the two strategies I think its a no brainer (if you can automate somewhat)

 

[RedSun]

I trade only futures, for its liquidity and low trading costs.

The cost for research is also lower.

 

[rfriend73]

Still an issue I debate..have had both winners and losers concentrating on trading just 2-4 instruments and also on trading off a watch list of 20-25 instruments.