stockgrl - Great points. I include here some notes about diversification. A great trader does not focus on the scoring the big 'homerun' with all his/her cash.
While diversifying' too much works AGAINST a trader, diversifying over time (days or weeks) works FOR the day trader. That is rotating a % of total funds, maybe 10 to 25%, in and out of stocks. That way, money is there if a great trade opportunity comes a long in the next few days.
I refer to 'TOOLS AND TATICS FOR THE MASTER DAY TRADER' by Valez and Capra, LAW#9, p. 126, as defense against those who will try to arque against you FOR heavy diversification. I'd always felt badly when making trades with larger blocks of $$$ until I read this. It really put things into perspective:
LAW #9: Don't Diversify
"Almost before we learned the difference between preferred stock and livestock, the concept of not keeping all our eggs in one basket was thoroughly drilled into us. Bus as time moved on, we began to question the validity of this dogma and, in the process, discovered some very interesting things. Tip: As an astute trader, you should questin everything and put to the test of reality even the most fundamentally accepted axioms. You'll be quite surprised at what you discover. Curiously, we found that being well diversified actually curtailed one's progres and cut short the potential profitability when a trader was right. However when the trader was wrong, diversification effectively served as a protective buffer against big losses.
Isn't that interesting. Diversification did not actually prevent losses, nor did it incraese the odds of being profitable. It simply provided a thicker cushion whenever the trader was wrong. Diversification does have its place. And as we'e preached many times, losing right is a big part of the game. It's just clear to us that diversification has less of a place when the trader has talent. In short, heavy diversification is nothing more than a substitute for lack of talent. It is a concept that was created to make one's losses more statisfying. While there are appropriate times to diversify, we would prefer you to throw your energies int becoming an overall winning trader. Think about it. What traders need diversification when they produce eight winning trades to every two losses? Traders who have reached that level of mastery are looking to leverage their high winnings precentage as much as possible. Diversification would only dilute that winning average." McGraw-Hill @2000
Isn't that great reading? It's a wonderful book and very light reading. I was able to read most of it in one night, skipping a few sections that were less interesting.
Don
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