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How to Diversify Your Trading Portfolio? Basic Approach

Author: Maks Artemov

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Dear Clients and Partners,

Trading in financial markets can bring profit and losses in turns. There are plenty of reasons for losing money, starting with unpredictable behavior of assets and through an unwisely collected portfolio. This article is devoted to the latter reason, discussing basic approaches to diversifying your portfolio for decreasing risks and getting the maximum from the market.

We all know the saying: “Never put all the eggs in one basket”, and it perfectly describes the danger of undiversified portfolios. Putting all the eggs in one basket here means investing everything in one instrument and waiting for a profit. Practice shows that this strategy does not always work.

What is diversification?

In investment, diversification means distributing your investment capital among various financial instruments to decrease risks and increase profit. This approach helps to compensate for possible losses that emerge from a decline of one of your instruments by making a profit on your other instruments.

Until the 1950s, diversification principles in the stock market were limited by fundamental analysis (Graham and Dodd’s theory): people chose investment options by studying the business of issuers, almost neglecting risks.

In 1952, in the Journal of Finance there was published an article on collecting an investment portfolio by a young postgraduate Harry Markowitz. His ideas from the article and his PhD thesis became the base for the modern portfolio theory.

Markowitz described a fully mathematical approach to forming an investment portfolio that allows choosing assets based on the profit/risk ratio. In 1990, he won the Nobel prize for his research.
In this article, I will not describe Markowitz’s ideas or the statistical aspect of forming a portfolio because these are the topic for a different, much more detailed talk. Before starting such a talk, you will need to understand the basic principles of diversification to avoid putting all the eggs in one basket already at this stage.

Basic diversification principles for an investment portfolio

In the modern world, all the branches of the economy cannot be growing at once. Hence, investors need to distribute their capital in such a way that in the case of a slump of an asset or group of assets in one sector of the economy the portfolio still generated a profit.

The basic diversification principle presumes distributing your investment capital among the shares of companies from different branches of the economy, as well as among various financial instruments.

Read more at R Blog - RoboForex

Sincerely,
RoboForex team

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How to Trade with Bulls Power and Bears Power Indicators?

Author: Victor Gryazin

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Dear Clients and Partners,

This article is devoted to using two indicators: Bulls Power and Bears Power – in financial markets. These indicators are meant for measuring the strength of trends.

How do Bulls Power and Bears Power work?

These indicators were created by a famous trader and the author of the book “Elder Triple Screen” Alexander Elder. They help estimate the current power balance of buyers and sellers and catch the moment when bears/bulls are getting weaker. The combination of these indicators is also known as the Elder Ray.

Bulls Power demonstrates the strength of bulls in the market. It compares the highs with the Exponential Moving Average. If the Bulls Power histogram is above zero and growing, this means buyers are holding the price above the EMA, and bulls are now stronger than bears. And vice versa, if the histogram is declining, dropping below zero, this indicates the predominance of bears.

Bears Power, in its turn, demonstrates the strength of bears in the market. It compares the lows with the EMA. If the Bears Power histogram is below zero and declining, this means sellers are holding the price below the EMA, and bears are now stronger than bulls. However, if the histogram starts growing and rises above zero, this means bulls are in control of the market.

In essence, Bulls Power and Bears Power are irregular oscillators. They appear in separate windows under the price chart. They look like bar histograms with the central line at zero. To determine the direction of the active trend, Elder recommends adding to the chart an EMA (13), drawn by close prices.

BullBearPower-1009x630.png

Installing and setting up the indicators

Bulls Power and Bears Power are included in many popular trading terminals. To install the indicator to the chart of your financial instrument in MetaTrader 4 or MetaTrader 5, go to the Main Menu: Insert/Indicators/Oscillators/Bulls Power and Bears Power.

The formulae of the indicators look as follows:

Bulls Power = HIGH - EMA (13)
Bears Power = LOW - EMA (13)

Read more at R Blog - RoboForex

Sincerely,
RoboForex team

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