Portfolio Diversification and Risk Management
Portfolio diversification can be a valuable stock investing concept for every investor whose ultimate goal is to maximize profit and minimize risk. The principle of maximizing profits and minimizing risks is so simple, yet its practice is seemingly an impossible task. While the best investment advice abounds throughout investment circles, any wise and mature approach to investing is the same. Your best protection against risk is portfolio diversification; investing in multiple investment options instead of choosing to place all of your investments in only one area. You can, for example, use the stability of cash investments like CDs and money market funds to diversify your portfolio and offset the liability of stocks, futures, options and stock or bond mutual funds. Picking stocks of riskier small growth companies while also investing in the traditional blue chippers, which are the stocks of large, well-established companies allows for a structured stability that will translate to the bottoms line of an investor’s portfolio. In other words, when the return is down in one area, it’s usually balanced by a positive performance in another. In the simplest terms, portfolio diversification is an excellent hedge against stock volatility and the ups and downs of investing.As with any stock trading plan, it is imperative to evaluate assets and realign the investment mix from time to time. For example, as the value of a stock increases, it consumes a larger percentage of the total, thus affecting the total diversification of the portfolio. In an effort to maintain a healthy balance, it may be necessary to decrease the holding in that particular stock and increase in a different area, such as bond or cash holdings. Such decisions require not only experience but the benefit of a method such as candlestick chart analysis.
In all likelihood, a well-diversified portfolio will contain most, or all, of the following: stocks, bonds, mutual funds, cash equivalents like Treasury bills or money funds, as well as other types of investments. Being able to diversify over a broad range of investment options can help minimize many of the dramatic ups and downs in investing. It has been shown through research that, over extended periods of time, investors are actually able to reduce the level of stock volatility in their portfolios (by diversifying) without sacrificing much in the way of profit at the bottom line. Establishing a well diversified portfolio is crucial, and it is dependent on available assets, money management, risk tolerance, and long term investing goals.
Simply stated, asset allocation is diversifying an investment portfolio among various categories, also know as asset classes. A typical allocation, for example, would put 60% of the available capital in stocks, 30% in bonds, and the other 10% in cash. It is important to note that the possible combinations of portfolio diversifications are endless, and no portfolio is right for everyone. It is imperative that the investor understand the risk reward ratios and evaluate his or her portfolio with long term investing goals in mind. It has been suggested that a beginner investing in the stock market put 80% of his/her investments in stocks or stock-based mutual funds, while more seasoned investors should consider a portfolio diversified more heavily in income-producing investments such as T-bills or corporate bonds. An understanding of portfolio diversification and the use of a stock trading system such as candlestick analysis can help all investors get much closer to achieving their investing goals.
Market Direction: The market is in a definite trend. That becomes the primary factor for technical analysis. What is the trend doing? When that can be assessed, candlestick signals provide an additional benefit. What is the basic assumption when a trend channel can be identified? That the trading will remain in that trend channel. Candlestick signals become a clear indication that the trend channel is maintaining. Being able to identify the signals (the investor sentiment) at obvious levels, the candlestick investor gains an advantage. What is occurring at those important levels can be evaluated very quickly.
Dow
The term "what" is better defined as what is the investor sentiment doing when it approaches important support or resistance levels. A strong bullish candle testing an upside resistance level with stochastics not yet into the overbought area and heading in an upward direction produces a much different scenario than a bearish candlestick signal with stochastics in the overbought area, starting to head back down. Being able to identify a reversal signal that may be occurring at important levels versus witnessing a candle formation that does not reveal any indecision makes trend analysis much easier to interpret.
Taking that knowledge and extrapolating at to individual stock positions makes being in the right direction at the right time with a much higher degree of accuracy. The Bearish Engulfing signal that formed in both the Dow and the NASDAQ on Friday revealed important information. The strength of the upward trend was diminishing when it hit the upper trend channel again. Where might be the support level after the resistance level appears to have held? Back at the bottom of the trend channel support level.
What becomes the best strategy with this knowledge? Depending on an investor's investment nature, taking some of a long positions off and waiting for buying to reoccur at the bottom of the trend channel or the more aggressive investor may start adding short positions with the expectation that they may have to be covered if support appears at the lower trend line. This is not a difficult investment formula. The candlestick signals not only reveal what is occurring at specific levels provides a fast evaluation for repositioning portfolio positions.
Urban Outfitters Inc. becomes an easy chart to analyze when being able to analyze the market direction. And Evening Star signal, followed by a Bearish Engulfing signal, followed by what could potentially be a Jay-hook pattern potential, is now revealed to be a short position still in progress. The possibility of a Jay-hook pattern was greatly diminished by seeing the Bearish Engulfing signal occurring in the indexes. That weakness in the markets also be in viewed in URBN makes continuing a short position that much more comfortable. The lower target areas, such as the 50 day moving average, still remain a viable target.
URBN
Use the information at the candlestick signals provide to your advantage. The signals reveal valuable information about investor sentiment. When this information can be analyzed for the market trend in general, it can additionally be extrapolated to individual stocks. The more you as an investor in place the probabilities of being in the right trade at the right time, the higher the correct-trade ratio becomes.
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Good investing,
The Candlestick Forum Staff