This question is specific to major pairs: EURUSD, GBPUSD, USDCAD, AUDUSD, USDCHF, USDJPY, NZDUSD. I am following a trend-based moving averages strategy which gives me a signal when crossovers happen, I’ve noticed that signals pop up for multiple pairs at the same time which are same direction (meaning either betting that USD will go up or down). So if I am taking trades on all those pairs, that would increase my risk although I am practicing good risk management. It would increase my risk because I will have, let’s say, 3 trades at a time that are betting that USD goes up.
For example, today I got signals to long USDCHF, short AUDUSD and short EURUSD. All three of these trades are basically in one direction and if, let’s say, a news is released that majorly effects USD, all 3 trades could end up losing.
So out of these 7 pairs, which ones should I remove? Or does it not matter much since the relationship of each pair is different? A bit confused. Seeking opinions.
Hi @jas0992
Do your signals provide a risk/reward profile for entering trades in the three currency pairs you identified? If so, you could choose the best of the three. For confirmation, you could pull up charts of AUD/CHF, EUR/AUD or EUR/CHF to compare the relative strengths of these 3 currencies.
Alternatively, you might consider entering trades in all three pairs but on one-third of the trade size. Then you will have diversified your short USD position against three majors without increasing the total dollar amount you are risking.
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This is a serious question which might help avoid serious losses. Lately I have been limiting myself to no more than 3 parallel trades per currency, each at 2% of my account capital from entry to stop-loss. However, I feel that 2% has been too high so have dropped to 1%: I am still keeping my parallel trades at not more than 3. Total risk per single currency should then be 3%
However, once a trade reaches a level where I can move the stop-loss to break-even (if my strategy allowed me to do this), I would be allowed an extra parallel trade, the total risk on the currency still capped at 3%.
Also of danger is going both short and long on the same currency. I was not successful when a newbie at avoiding this.
But in spite of all the above, bear in mind that if the big players suddenly pull out of, e.g. AUD, let’s say because of heightened geo-political risk, they’re almost certainly pulling out of NZD at the same time, and probably EUR. But the money withdrawn has to be in some currency - so if the banks close long AUD positions, they will be “paid” in another currency, and this might be USD or JPY. And they might prefer USD so they can pile into Gold. So, often, when a major trend in one major currency breaks, so do others, meaning that diversification is not going to be the protection it ought to be mathematically.
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What do you mean by parallel trades? If you have two trades open of EURUSD and GBPUSD each, are you calling this a parallel trade? And USDJPY and EURCHF is not a parallel trade?
Yes. In this sense, more than one trade on the same currency in the same direction, so yes, long positions on EUR/USD and GBP/USD would be 2 parallel longs on USD. This doubles your capital risk if anything good happens to the USD (but it also doubles your reward if something bad affects the USD).