I’m going to assume that you’re going to have multiple positions open at the same time, right?
So my suggestion to you is that, make sure the multiple positions that you have open at the same time are generally not correlated.
A way of making sure they are not correlated is just to make sure that if I get into this trade right now, let’s say I do a long trade in this particular Stock A, and this Stock A is a bank, make sure the rest of your other positions are not finance or bank related.
They can be in oil and gas, they can be in pharmaceutical, they can be in the tech company, but not a bank-related company.
And that is how you diversify your risk.
Because if, let’s say, suddenly, there is a change of interest rate, it affects all the bank. If you have multiple positions on the bank, you will encounter all your bank positions all liquidated at the same time.
Which means, essentially, instead of taking a 1% risk on one trade, you are taking a 3% risk on the entire sector.
Okay? So just make sure your open positions, multiple open positions are generally not related to each other in terms of industry, or they are not a direct competitor, or direct substitute as well.
Because direct substitute, it’ll mean that they are like inversely correlated, right? One goes up, the other go down.
Okay, so you want to generally reduce the correlations to, let’s say, zero, instead of one or minus one.
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