Have you recently started your trading journey? If so, you’re not alone. Some 1.8 million UK adults became day traders during the pandemic for the first time. But half either lost cash or broke even, with many more likely dropping out since restrictions eased. So how can you increase your staying power and find long-term, sustainable success?
While savvy traders rely on a multitude of factors including in-depth market knowledge and resilience, portfolio diversification is another key element. This means investing in several different areas of the market, using different strategies, to minimise the chances of one downturn affecting your overall portfolio.
Why Should You Create A Diverse Forex Portfolio?
To use a familiar phrase, it means not putting all your eggs in one basket.
By spreading your investments across a range of assets that are influenced by different factors, you reduce your exposure to ‘unsystematic risk’ – such as events that primarily affect one currency or region, for example.
You can’t negate all risk, of course, and it’s inevitable that you’ll incur some losses. But balancing these losses out with uncorrelated investments prevents you losing everything and improves your chances of winning in the long run.
It also allows you to experiment with your trades, increasing the potential of you encountering favourable conditions and turning a profit.
So how can you go about diversifying? Read quick tips below.
How To Diversify Your Forex Trading
Use a mix of currency pairs
Proper diversification means spreading risk across multiple asset classes. But if you’re sticking to trading on the forex market, you’ll want to invest in a mix of currency pairs with different levels of risk.
That could mean using a foundation of major currency pairs that are less volatile, such as the EUR/USD, GBP/USD and USD/JPY. You’d then add a few minor exotic pairs, such as EUR/TRY, which are more volatile and so create greater opportunity for large profits or losses.
Generally, you’ll want to avoid having too many currency pairs with direct correlation too. That means exploring pairs from different regions which are influenced by separate factors.
Learn different trading strategies
Another way to reduce commonalities between the positions in your portfolio is to adopt different strategies. Trading styles are dictated by the timeframe and length of period the trade is open for – for example short term and seconds or minutes, or long term and weeks or months. Mix it up and see which strategies generate the best returns.
Experiment with trading times
Different currencies around the world also perform differently depending on the time. You might have got into a routine of executing all your trades at a certain time of day – but experimenting with different windows could show you new opportunities.
You’ll still need to consider risk for your individual trades of course. But by diversifying through the methods described above, you could reduce your overall risk factor and tip the odds in your favour.