All You Need To Know About Basket Trading – Guide 2024

By Wilbert S

January 10, 2024   •   Fact checked by Dumb Little Man

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When it comes to the financial markets, one of the most important parts is managing risk. Whether you are trading stocks or currencies, you must have a plan to protect your capital. This is what makes you successful or a failure.

As a smart trader, you can use several methods to minimize risk. For example, one such method is diversifying or spreading your capital on different trades. And basket trade is a type of trade that does just that. You can use this method to diversify your risk and increase your chances of making profits.

To deeply understand the concept of basket trade, we’ve got Ezekiel Chew from Asia Forex Mentor to share his take on the matter. Ezekiel is a seasoned forex trader and mentor, and he will elaborate on basket trading and how traders can use this method for successful trades.

So, read through the guide as we discuss how it works, basket trading with forex, stocks, and commodities, its benefits, and more.

What is Basket Trading?

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Basket trade is an investing strategy that involves buying a group or “basket” of stocks, typically with similar characteristics. Basket trading aims to diversify risk and potentially increase returns by spreading the investor’s capital across several different securities.

Basket trade can be used to implement different investment management strategies that allow investors to target specific risk and return objectives. For example, an investor seeking exposure to the healthcare sector may create a basket of stocks that includes companies involved in medical research, pharmaceuticals, and healthcare services.

Basket trading is also often used by hedge funds and other institutional investors to efficiently execute trades in a large number of securities. By buying or selling a basket of stocks, these investors can quickly and efficiently take positions in several companies without executing a separate trade for each security.

This strategy is not limited to one financial market but is most commonly used in the forex or stock markets.

How does Basket Trading work

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Basket trading involves creating a portfolio of securities, which can be stocks, bonds, currencies, or other assets. The portfolio is typically created with the help of a financial advisor or investment manager.

Once the portfolio is created, the investor will choose an amount of money to invest in each security. The weighting of each security in the basket will depend on the investor’s risk tolerance and investment objectives.

When it comes to picking which currency pairs to trade, investors use several methods. But, stocks and index investment funds can be either custom-made or automatic based on the specific index or a trader’s preferences.

Basket Trading with Forex

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A basket in foreign exchange trading includes numerous currency pairings. Traders typically search for a currency pair with a distinguishable bearish or bullish trend on the forex market. After identifying this currency pair, they pick different currencies to trade in the ‘basket’ based on their trend. The base currency is the one used to speculate and analyze. Therefore, the currencies chosen have to be related to the base currency pair.

For example, if an investor is scanning the market for a base currency pair, they might choose GBP/USD and notice that the market has a downward trend (bearish). It depicts that the USD is getting stronger than the British Pound. After the investor makes his speculation, he may choose to trade several other USD pairs based on this Prediction. By expecting other markets with the USD to behave similarly, he can spread out his capital and manage risk more effectively.

You can also purchase ETFs while actively trading multiple currency pairs in the foreign exchange market. The Invesco DB U.S. Dollar Index Bullish Fund ETF would be a fine example. This ETF is designed to track the price of the Pound, Euro, Swiss Franc, Swedish Krona, Japanese Yen, and CAD against the US Dollar. Of course, other ETFs are intended to perform the same way as this.

Basket Trading with Stocks  

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The stock market is highly volatile, so the basket strategy is highly preferred for trading stocks. Based on technical analysis, investors may either invest in sector ETFs or build trade baskets tailored to them.

For example, an Investor believes the market will take a certain path, so he wants to trade in the healthcare industry. This might be influenced by introducing a new drug or tax changes. The investor may take several stocks from various sectors that will benefit from the event and trade them as a basket rather than putting many trades in the sector.

Investors who want to set their stock ETFs generally choose ones against a specific benchmark bond. For example, these ETFs usually contain 15 different stocks or more. As with custom baskets, the stocks in an ETF must meet certain criteria before being selected. These prerequisites could be factors such as fractional share prices and market capitalization.

The basket is then weighted according to its value, with the share weighting varying based on stock prices since stock markets are unpredictable. How funds are distributed among the securities in a basket is referred to as basket weighting. Various factors, such as value, dollar, and percentage allocations, are considered when determining basket weight.

Allocating a specific amount of money to different positions in the trading baskets based on the entire basket value is known as dollar weighting and percentage weighting. Depending on an investor’s technical analysis of various asset classes, these weights might be distributed equally or proportionally. Share weighting entails allocating shares to individual positions in the stock basket randomly.

Basket Trading with Commodities  

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In the world of commodities, basket trading is not as prevalent as it is in other markets. The main reason is that most commodity futures contracts are traded on exchanges with specific expiration dates. As a result, positions must be closed or rolled over before the contract expires.

Traders can utilize the basket trading strategy while commodities are against an underlying index. A great example is buying the NYSE USO Oil ETF, which tracks the price of petroleum products, and the GLD ETFs and NYSE CORN. It provides broad exposure to multiple commodity sectors and can help diversify a portfolio. You can construct a portfolio with an ETF or mutual fund. For example, in this situation, you might use many different weightings to buy or sell these ETFs.

Basket Trading Advantages  

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As shown in the outline above, the basket trade strategy has unique benefits that other trading strategies don’t. These are some of the advantages of using baskets to trade currency, stocks, or commodities:

#1- Time-Saving

Basket trading is a time-saving strategy. You can trade a basket of assets in one go rather than placing many different trades. You track the market movement of the basket as a single entity rather than tracking and analyzing all of the securities in it individually.

Basket trade is also quicker because you may create numerous positions across several sectors with just one order. In addition, it is possible to set up trading orders that automatically open and close positions using the basket trade method.

#2- Personalized Trading

The basket trading strategy is a personalized way of trading. You can tailor it to match your minimum investment amount and risk appetite. Besides that, you’re also not restricted to trading a particular asset class. You can trade any asset, including commodities and currencies. It is convenient and increases your chances of profitability if you can predict the market.

Customized trading is also quite beneficial for experienced and professional stock traders as they choose the stocks based on market analysis to generate higher ROI. When you personalize your trading, you can trade in the best market sectors you understand. For example, if you follow news on healthcare stocks, you can focus only on those companies. This usually results in more successful trades.

#3- Investment Control

With basket trading, you’re in complete control of your investments. You decide which assets to trade and how much to invest in each one. You can trade as many or as few securities as you want from a basket at any point.

A basket trade strategy also aids in reducing an investor’s risk. This is because financial instruments in a basket cancel each other out, thus protecting the investor from market swings.

#4- Easy Capital Allocation

Basket trading allows for easy capital allocation as there are different weighting methods. Traders can allocate different securities in the basket with varying weights. This means you can trade a portfolio of securities without holding them all in equal proportions.

Without this trading strategy, investors would need to trade securities individually — a time-consuming and complex process. When dollar weighting or percentage weighting is utilized, basket traders have a significant advantage as they don’t need to perform numerous calculations.

#5- Reduce Exposure to Volatility

Basket trading can help reduce exposure to market volatility. Investing in a basket of assets can spread your risk across different asset classes and sectors. This diversification can help cushion the blow if one of the securities in the basket experiences a sudden drop in value.

Diversification is a key element of risk management, and basket trade offers an easy way to achieve it.

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Ezekiel Chew's Biography

Asia Forex Mentor offers the best forex trading education in Asia. The course is set up so that you can earn money while learning. You’ll be able to trade forex profitably with a skilled trader’s help. In Singapore and other sites worldwide, tens of thousands of people from the United States, the United Kingdom, and other Asian countries have been taught.

Ezekiel Chew’s teaching method is founded on the principle of return on investment, which states that if you invest $1, you will gain $3. It’s not about zany strategies or elaborate procedures. Professional traders and financial organizations use his authorized system. He is the driving force behind the growth of various companies, including DBP, the Philippines’ second-largest state-owned corporation.

Due to his strategy’s effectiveness, many full-time traders have joined the program with little to no prior trading experience and emerged successful.




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Conclusion: Basket Trading

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Basket trading was formerly limited to mutual funds, hedge fund managers, institutional investors, and a few wealthy retail traders due to the high capital demands of most brokers. However, thanks to today’s innovative trading systems, average program traders may participate in basket trade without having large cash reserves.

If you want to invest, you can use a single watch basket or multiple transactions. Keep in mind that with basket trades, you can trade securities at once —  which is more efficient than trading each security separately. The goal for types of trades is the same: earning a return on investment while minimizing risk exposure.

Trading a basket of securities also offers greater flexibility when allocating assets. For example, you’re no longer limited to investing an equal sum of money in each security. Instead, you can weigh securities according to your preferences.

Basket Trading FAQs

Is Basket Trading Profitable?

Yes, a basket trading strategy can be profitable. However, it is important to note that no trading strategy is risk-free, and there is always the potential for losses. However, if you can handle this strategy correctly, you can easily eliminate risk and increase profits.

What are the requirements for Basket Trading?

For an effective basket trading strategy, you will need a broker that supports this type of trading. You will also need to have a firm understanding of the market and the assets that you are trading. It is important to remember that basket trading is a complex strategy and is not suitable for everyone.




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Wilbert S

Wilbert is an avid researcher and is deeply passionate about finance and health. When he's not working, he writes research and review articles by doing a thorough analysis on the products based on personal experience, user reviews and feedbacks from forums, quora, reddit, trustpilot amongst others.

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