Diversification

We all hear diversification is the best policy for an overall investment portfolio. This is also true amongst our currency focused investments as well. To be well diversified we should master the use of multiple trading strategies and multiple currency pairs.

Some trading strategies boast 80% accuracy in specific market conditions. However a full-time trader must utilize more than this single strategy as many times there are long periods of time when the trading conditions are not met, such intervals can last anywhere from a few days to several months. What good is a single strategy that can yield profits for only a small portion of the year? Diversification may be the answer.

Diversifying your investment is not the most popular of investment topics. In fact many people believe diversifying dilutes trading profits. But most investment professionals agree that while it does not guarantee against a loss, diversification is the most important component to helping you reach your long-term financial goals while minimizing your risk. But, remember that no matter how much diversification you do, it can never reduce risk down to zero.

A Well Defined Portfolio

What do you need to have a well diversified portfolio? Three aspects to ensure the best diversification:

Your portfolio should be spread among many different trading strategies
Your trades should vary in risk and time held. Picking different trade opportunities with different potential rates of return will help the gains offset losses of other trades. Keep in mind that this doesn't mean blindly placing trades all across the spectrum!
Your currency pairs should vary by region and crosses, minimizing unsystematic risk to small groups of countries
Another question people always ask is how many currency pairs they should trade to reduce the risk of their portfolio. One portfolio theory for stocks tells us that after 10-12 diversified stocks you are very close to optimal diversification. However in the currency market this doesn't mean buying 12 currency pairs will give you optimal diversification, instead, it has been recommended to trade currencies of different regions and importance levels (i.e. majors, crosses and more exotic currencies).