You’ve started building your virtual proprietary trading portfolio, but what happens next? Diversification. This process is a vital financial strategy for managing risk. Knowing how to diversify your portfolio for virtual prop trading can help you create more gains and manage your risk.

What Is Diversification?

Diversification in virtual prop trading is the act of trading with various asset classes and different securities within each asset class. The concept of diversification exists in all types of financial portfolios, from forex to indices. While many people diversify their portfolios for long-term gains with different funds, diversification is more fast-paced with virtual proprietary trading since multiple trades can be made in a single day.

Why and When Should You Diversify Your Portfolio?

An essential concept in virtual prop trading is that not all trades are equal, as some trades have more potential for risk than others. Portfolio diversification is a way to create a balance between high-risk and low-risk trades to manage risk across the board. If a high-risk trade results in a loss, the lower-risk trades can lead to gains that help you recover that loss. In some cases, your medium-risk and low-risk trades may lead to overall gains despite a major loss.

Diversifying gives you the chance to minimize risk while optimizing your trading strategy, so it should be an ongoing process. In virtual prop trading, regular diversification is a matter of regularly allocating your capital to different assets as you buy and sell. While it may seem natural to diversify your portfolio in virtual prop trading, it’s more than just buying new assets — it requires strategy.

5 Ways to Diversify Your Portfolio

With these tips for diversifying your portfolio, you can strengthen your virtual prop trading strategy.

1. Embrace Companies of All Sizes

Different company sizes will offer different asset prices and fluctuations. Indices are an excellent way to diversify your portfolio with different company sizes because these assets aggregate various companies of differing sizes into a single tradable vehicle.

Large enterprises will typically have a much higher cost per asset but offer consistent growth that can lead to some impressive gains, even within a single week. These companies are often the ones that have asset changes based on the news and can present opportunities for trading as a result.

2. Trade Multiple Asset Types

The marketplace offers a wide variety of asset types, all of which present their own opportunities for growth. A diversified portfolio typically includes a mixture of asset classes and assets within each class. In virtual prop trading, you’ll often deal with forex or indices, but you’re not limited to this type. Other assets traded include:

Trade Multiple Asset Types

  • Currencies: In forex trading, one currency is exchanged for another. For virtual prop traders, the forex market presents potential through the changes in the exchange rate and interest rate differential. Traders can use many of the same strategies they apply in the stock market to create gains in the forex market.
  • Commodities: Raw materials used for producing goods are known as commodities. Examples include oil, natural gas, grains and gold. Specialized commodities exchanges allow traders to buy contracts on these commodities. In the case of day trading or virtual prop trading, these contracts are used to generate gains based on volatile price movements, so the contract is not traded to receive the commodity. This type of asset is often considered an inflation hedge.
  • Crypto assets: Crypto assets include any purely digital assets that rely on public ledgers online to prove ownership. There are various types of crypto assets, including utility tokens, cryptocurrency, security tokens and non-fungible tokens (NFTs). Common risks associated with crypto assets include volatility and liquidity. New crypto assets often emerge as technology develops, which can impact your trading strategy.

3. Trade Within Multiple Sectors and Geographies

Industries and geographies are another excellent way to diversify your assets. Just as company size can dictate risk, industry can as well. When trading assets, it can be helpful to have a broad range of sectors, like e-commerce, technology, healthcare and beyond. When trading within one industry, all of your assets can be affected by economic factors focused on one sector, including unexpected downturns.

Different geographies offer the same benefit. Every country has its own economy and events that can impact the value of an asset. By trading assets from multiple countries, you can balance out potential risks in one location. For example, when trading commodities, you can look for ones rooted in various economies. Oil and grains are two different commodities that can come from different countries, and including both in your portfolio supports diversification.

4. Rebalance Regularly and Continue Building

A helpful practice for diversification is regularly assessing your portfolio and adding balance when needed. For example, you might notice that many of your commodities are all centered around one economy. In this case, you can look into diversification opportunities with commodities based in other countries. You can also diversify with other asset types, such as forex, crypto assets or indices.

While you can sell assets and replace them with new ones, you can also build your portfolio. Generally, the more assets you have, the easier it is to manage risk because you have more assets to fall back on if one type leads to a significant loss.

5. Know When to Sell

Trading is fast-paced, and it’s important to know when an asset is no longer worth your time. Analyzing patterns in the market and looking for telltale signs of impending weakness can be helpful indicators of when it’s time to sell an asset. Ultimately, your diversification can only protect you from risk to a point. You have to know when it’s best to sell before an asset takes a dive.

If you’re interested in virtual prop trading as a career, the more you trade, the more you’ll get better at recognizing when it’s time to sell.

Start Virtual Prop Trading With SurgeTrader Today

SurgeTrader is a virtual trading prop firm that gives you the resources to make solid gains from your trading activity and skills. Our traders have access to a wide array of assets through our broker, as well as access to virtual funding up to $1 million. You have the chance to work with your preferred instruments and create gains according to your favorite trading strategy.

To join the trading community at SurgeTrader, start by preparing for your Audition. We work with highly strategic traders, and we’re interested in learning about your skills. Take an Audition today to get started.

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