Hi,
just wondering, do you guys diversify you portfolio? As in running several trades at once.
Because of the inconcistency of my individual trades, I need a broadly diversified, uncorrelated portfolio.
- Kingen
there are lotsa ways of diversification and what works for some might not work for others, some people dont take same trades(long or short) in correlated pairs and some do, and some might treat the whole trading in forex as not diversified as the old saying (dont put all your eggs in one basket) where they consider forex as one basket, so it depends on your risk tolerance, so work your out and try different things till you reach your optimum level of risk and diversification(comfort zone).
hope my post will help
regards
2.minutes
Diversification in forex trading is basically making sure that you don’t end up overexposed to any one currency. If you’re trading only one pair at a time, then no problem. If you trade multiple pairs, you need to watch out.
if you call diversification trading multiple pairs at once, then yes, i am diversifying. howver, i stick to a system, so i don’t diversify all the time. sometimes i have only one position open on one currency, sometimes i have positions open on 5 currencies
If you are having inconcistency issues then I think you need to rethink your system and or money management.
I just asked this question because I wondered if anyone else did this.
I don’t have any live experience trading FX but in stocks, diversification makes up for the incosistensy of the individual trades.
In stock terms, diversification is the process by which one attempts to minimize the impact of the risks of any specific stock or sector on one’s portfolio. It is a very specific and conscious process. Most traders don’t really do it the way it’s supposed to be done. They might hold multiple stock positions, but usually that’s more about seeing opportunities in them than making a real attempt at diversification.
At least, though, in the stock market diversification is relatively easy because of the wide array of available instruments. In forex it’s very hard because there are so few currencies involved. As soon as you start taking on multiple positions you create all new dynamics.
I see.
Would you say that currency pairs are in general less correlated than large-cap stocks, or more correlated?
The most important aspect for me, is that the instruments I trade don’t change their “direction” simultaneously. That is also one of the reasons im partly moving away from stocks, atleast here in norway,too many things are too correlated for my taste.
If you don’t have exposure to one single currency (or a closely related set of them such as EUR and CHF) then you generally won’t see a huge amount of simultaneous directional action in your pairs. Here’s an example of what can happen, though, if you’re not paying attention.
Let’s say first you go long EUR/USD. Then you go short and equally size USD/JPY position. From the first trade you are long EUR and short USD. When you put on the second position, you double your USD short position and add a long JPY. The net result is that you’re doubly exposed to anything USD related.
Now let’s changes things a bit. You still go long EUR/USD but instead of shorting USD/JPY you go long. In this case the USD positions cancel each other out. What’s left is a long EUR and a short JPY. In other words effectively a short EUR/JPY position.
That’s why you need to pay attention to your net position when you have multiple trades going.