Value of Diversification

Diversification can be advantageous as it is just the old story of spreading one's risk, as one does with a share portfolio. Essentially to trade only one currency pair when there is a trade at the same time in another currency pair reduces your overall ability to cut losses and let profits rde.

Diversification accomplishes two investment goals:

• Increases the probability of reward.

If one currency trade becomes unprofitable, many times a winning trade in another currency pair can recover the first loss and leave you with additional profit.

However, not all currency pairs will give true diversification. Some pairs mirror each other so often that, in essence, you are merely working twice as hard on the same bask trade strategy with no real diversification. For example, the U.S. Dollar/ Swiss Franc moves in a very smilar fashion to economies that are fundamentally different from each other. We know that some people like trading a particular currency because they are intuitive as to how it will behave. The point is that if you are confident for instance, how the Swiss Franc moves, you would have a good idea, depending on the relationship to the U.S. Dollar what direction the Pound the Euro and Yen would travel. That means that trading the interrelationships between those currencies you are not really getting diversification.

As we trade patterns, trend lines and fit) points, there is the opportunity usmg our skill base, to trade with an equal chance of success, a number of different currencies.

Perhaps by just looking at the big currency pairs we are missmg out on opportunities to diversify. However it is important if one is going to trade other currencies that you trade deregulated currencies where there is likely to be tradable movement.

Initially beginners are recommended to trade one currency only and as they become more experenced, diversify.

Was this article helpful?

0 0

Post a comment