Not if you split your risk between the two…
[I]Not if you split your risk between the two…[/I]
How is he gonna do that if he has got the same base/quote currency aka USD/CHF…EUR/USD in his 2 positions he is trading…?
Bid/Ask variation won’t do it. Lot size won’t do it. Hedging won’t get him anywhere.
He has got to know market bias and who is the driver in the two currency pairs he want’s to trade.
Otherwise he will suffer his loss twofold if PA goes against him. And he has figured that. The reason for this he hasn’t figured, yet. Because people seem to think that their own bias is the same as market bias. It is not. 
"How is he gonna do that if he has got the same base/quote currency aka USD/CHF…EUR/USD in his 2 positions he is trading…? "
CHF is different than EUR. They may correlate some, or even most of the time, but not all of the time. To take advantage of this fact, here’s what I posted earlier:
“Bid/Ask variation won’t do it. Lot size won’t do it. Hedging won’t get him anywhere.”
I beg to differ. Lot size WILL do it. It’s called diversification. I didn’t invent this, it’s pretty standard stuff.
“Otherwise he will suffer his loss twofold if PA goes against him”
Again, re-read my post. He will suffer two losses if both trades go against him, but if he only has half his original amount on each trade, together the loss will NOT double. It’s simple math.
You cannot control how a trade is going to go. You have control over WHEN you enter/exit a trade and HOW MUCH risk you’re willing to take.
If you have all your eggs in the same basket and you drop your basket, you loose all your eggs. But if you carry two baskets with half your eggs in each one, even if you drop both, you don’t loose more eggs than you had in the original basket. Again, I didn’t invent this stuff, it’s pretty common practice among most fund managers.
If your baskets are tied together with a very short string you will drop both baskets:D. Its the same as one trade plus an extra spread.
I would stay away from trading like this unless you have a really good understanding of how pairs are related. and as Cas has said you need to know the “driving currency” to help in determining how a change in rate of one pair will affect correlation in the short term.
You’re right about the spread. But again, if you reduce your position size in half, the price you pay for the spread ALSO reduces in half. More simple math.
If you trade 2 micro lots and your spread is 3 pips, you’re paying 6 cents. If you trade 1 micro lot in two separate trades, you’re paying 3 cents in each trade, which is 6 cents total.
“Trading like this” involves NO understanding of “how pairs are related”. It involves simple math and back-testing.
But hey, if simple math scares you, by all means stick to your one pair. I will continue to enjoy the benefits of diversification.
If Cas, or anyone else, can define what the “driving currency” and how it affects the diversification principle that I described, I’m all ears.
I’m guessing, however, that I’m going to hear a lot of categorical imperatives and little math like:
“He has got to know market bias and who is the driver in the two currency pairs he want’s to trade. Otherwise he will suffer his loss twofold if PA goes against him.”
Again, fancy concepts like “market bias” and “driver [of] pairs” may be impressive to noobies, but I find no definition and even less measurements of precisely HOW one affects the other.
“and as Cas has said you need to know the “driving currency” to help in determining how a change in rate of one pair will affect correlation in the short term.”
If you take a trades in EUR/USD and EUR/JPY and a news event or economic situation affects the value of the Euro The correlation of the pairs you are trading will be affected less than if the news affected the value of the Dollar.
Driving currency is maybe not the best way to state this as it implies one currency in the pair is always in control.
I totally agree that if you cut the size of the individual trades down your risk is essentially the same. You cant just assume because you have multiple positions open in multiple pairs you are diversified. You really need to look at how each pair is related and what economic news is affecting what currency(not pair) and driving the rates to ensure diversification.
We agree. If you re-read my original post, I made a point of mentioning the obvious fact that this is not 100% diversification. No matter which way you cut it, the USD is part of both trades, so the best you could do is 50%. My point is that, given the limited amount of available instruments in Forex, SOME diversification is better than NONE.
As to your other points, I’ll stay out of that as I don’t use fundamental information (including news) in my trading. I trade longer term, so these intra-day fluctuations don’t affect me as much.