What Market or Markets Will You Trade
The next decision is whether to specialize in one market or to diversify across different markets. This is a very personal choice. At first glance it would seem easier to focus all of your attention on a single market. However, there are pitfalls to such an approach. First, it is extremely difficult to always make money in any single market. So if you trade only one market and you go into a bad period of trading, you have no other avenues for offsetting your losses as you might if you were to trade a diversified portfolio of markets. Secondly, experience has shown that the majority of traders who have, successfully specialized in one market are floor traders who actually "make a market" in that commodity. A little explanation is required in order to understand the benefit they enjoy.
If you want to place an order in a particular market, you can call your broker and ask for the latest "bid" and "ask" prices for that market. If you are trading September Soybeans for instance, he may tell you "the bid is 510, the ask is 510 1/4." This seemingly tiny spread has significant implications. What it means is that if you immediately place a market order to buy September Soybeans you will buy them at 510 1/4. If you immediately place a market order to sell September Soybeans you will sell them at 510. The person on the other side of this trade is the "market maker," who is the individual who sets a bid and ask level (in reality it is not just one individual). In essence, for the "privilege" of getting a fill you are giving up a 1/4 point, or $12.50 on one contract in this example. In other words, if the bid and ask are 510 and 510 1/4 respectively, and an order to buy comes into the market, the market maker stands ready to sell at 510 1/4. If an order to sell comes in the market maker stands ready to buy at 510. The retail trader pays the difference between the bid and the ask and the market maker pockets the difference. In theory, the difference between the bid and ask is a risk premium intended to give market makers some inducement to assume the risk of making markets.
The purpose of this discussion regarding bid and ask prices is to illustrate why traders who successfully specialize in only one market are usually market makers and not retail traders. Simply stated, they have an "edge" by virtue of being able to buy at the bid and sell at the ask. The retail trader never buys at the bid nor sells at the ask. If you plan to be a market maker or if you truly feel you have some type of edge in a particular market, fine, just trade that market. Otherwise, it is suggested that you trade a portfolio of at least three markets.
Categories in Trading Mistakes
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Using too much Leverage
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Failure to control Risk
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Lack of Discipline
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