For the novice trader, a key question is – how many trades should you try to run at one time?
Is it one – or a dozen? A possible answer is "no more than one". Conversely, you may be urged to keep as many balls in the air as possible. If one is the obvious lower limit, is there an upper limit?
The simple, and not very helpful, answer is that it all depends on the individual, with some prefer an intense focus on one trade at a time, while others like to indulge their buccaneering instincts and ride several horses at once.
Lower costs and fewer risks
In fact, there is some truth in this, as we shall see later. First, we’ll look at the case for “one at a time.”
Conversely, running several trades at the same time is a sure way to increase your dealing costs, paying over more of what could have been stake money before you even started to trade.
A second benefit is lower risk, although this needs to be qualified. Running, let us say, three trades at the same time is likely to be tying up more of your money than running just one. That means that a loss on, again let us say, two of those trades will be more significant than would it be if just a single trade turned out badly.
It can be argued that having multiple trades in play at any one times spreads the risk rather than increases it, and there is some justification for this reasoning. But it is important not to confuse trading with investment.
For an investor, risk diversification has clear benefits. A portfolio diversification strategy can guard against catastrophic losses because the different assets will, if such a portfolio has been correctly constructed, face different risks.
The picture is cloudier with regard to traders. A position has been taken because the trader believes they have a better idea of the prospects for the security in question than does whoever is standing on the other side of the trade. This is particularly the case when trading
It can be argued that having, for example, two trades in play at the same time halves the chances of both positions being wrong. But what can be gained from the insurance policy aspect of running two or more trades may well be lost in terms of lack of focus.
Watching the eggs in the basket
Critically, one trade at a time is an approach that forces the trader to focus intensely on the deal in question. This is linked to a final benefit to be had from single trading, which is that it removes the temptation to believe that losses on one trade will be recouped on another, regardless of the likelihood that this will happen.
Put your eggs in one basket, may be the advice of those who urge one trade at a time, then watch that basket very carefully.
Another arises from the obvious fact that playing one trade at a time is an all-or-nothing proposition. There is no fall-back if the trade does not go the way you want it to. In such a situation, the trader may well decide there is something to be said for the “insurance policy” approach to running more than one trade at a time, based on a portfolio diversification strategy.
Which takes us back to the question of risk diversification and its role in financial risk management. The benefits may be much less clear cut for traders than for investors, but a well-founded and carefully thought out process of selecting two, three or more trades to be played at the same time ought to reduce the chances of loss, a classic case of risk diversification.
Let the strategy take the strain
So, which is it to be – single or multiple trading?
One answer, accepted by many in financial markets, is that the question is putting the cart before the horse. First, draw up a trading strategy, complete with price trigger points for specific actions, such as buying or selling. If you follow that strategy in a disciplined manner, then the number of trades will emerge of their own accord.
Should just one of your “buy” action points be triggered during a specific trading period, then you will be a single-trade player. If more, then you will be multiple trading.
In short, the strategy is making the decision for you.
Two words of caution, however. First, outsourcing your decision as to the number of trades can work only if the strategy is soundly based and its performance regularly reviewed, with appropriate adjustments in light of experience.
Second, no trader can ultimately absolve themselves of the responsibility to judge how many trades they feel comfortable and confident about running at any one time. In that regard, at least, those who say that financial risk management “all depends upon the individual” are right.