I read this article on the net regarding diversification and money management
Diversification
Trading one currency pair will generate few entry signals. It would be better to diversify your trades between several currencies. If you have 100,000$ balance and you have open position with 10,000$ then your core equity is 90,000$. If you want to enter a second position then you should calculate 1% risk of your core equity not of your starting balance!. It means that the second trade risk should never be more than 900$. If you want to enter a 3rd position and your core equity is 80,000$ then the risk per 3rd trade should not exceed 800$
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I like this strategy of having multiple positions opened at the same time.
But I don’t understand it quite well when it come to proper money managemen, mainly, how to best calculate risk %.
For example:
if I have a 5,000 account and I open 4 positions risking 40 pip each (total pips would be 4x40 = 160 pips)
Am I risking more than 2% ?
I believe I am, but after reading the article above I got the impression that the 2% risk is linked with each open position - so it seems that, if I wanted to be inside the 2% risk I could risk: 4 open positions x 100 pips (the 2%) = 400 pips (!!!)
To summaryze my question:
[ul]
[li]should I apply the 2% risk to each position (each position could have a risk of 100 pips)[/li][*]or should I apply the 2% to my total open positions (total open positions should be risking a total of 100 pips)[/ul]Kind Regards
The quote takes each position seperately such that the three positions outlined represent 2.7% total risk ($2700/$100,000).
But that’s not the bigger issue. Diversification in forex trading is a tricky thing because of the relationship between pairs. Before entering into two positions at the same time, make sure they aren’t highly correlated or that doing doesn’t end up giving you an exposure you weren’t anticipating.
When I was starting out, I didn’t want to get too involved with trading multiple pairs. Like Rhody pointed out different pairs have different correlations to other pairs, it can either work for you or against you.
To keep it simple at first, I just traded one pair at a time. Then learning lessons from books from the past. i.e. Jesse Livermore. I tried to incorporate the, if you are right on the trend and first position is showing you a profit. I would open a new position in same pair. Kinda of the dollar costing long in the uptrend or dollar costing short in the downtrend.
I diversify my portfolio across different investment instruments, that way you don’t have to focus on trying to diversify across multiple currency pairs.
Well I was mainly stressing at first just about, when I started out, not wanting to negate my currency trades with multiple pairs when I could barely get my head around basic concepts in forex markets. So just traded one pair at a time, with a portion of my portfolio.
I think you noted something in your question to me, that pretty much sums up “my” ideas on what diversification means to me. Either it is across different instruments or just in one market, Correlation is the major key in my eyes.
Like in Equities, countless books talk about diversifying across different sectors, which in my eyes isn’t really diversifying since “most” sectors move in conjunction with the overall market. Either find something that has a negative correlation that your already investing with or something that has no correlation.
Gold might work for you or might actually negate what your already trying to accomplish.