We all know that diversification is the best policy for any investment portfolio. This is also true for our currency-focused investments. To be well diversified, we should master the use of multiple trading strategies and currency pairs to equalise our overall return. Some trading strategies boast an accuracy rate of 80% in specific market conditions. However, a full-time trader must utilise more than this single strategy. Many times there are long periods of time when the desired trading conditions are not met, with such intervals lasting 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? Strategic diversification would 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 whilst minimising your risk. But, remember that no matter how much diversification you do, it can never reduce risk down to zero.
What do you need in order to have a well-diversified portfolio? Here are three factors to ensure the best diversification:
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 to 12 diversified stocks, you are very close to achieving optimal diversification. However, in the currency market this does not mean that buying 12 currency pairs will give you optimal diversification; instead, it is recommended to trade currencies of different regions and importance levels (i.e. majors, crosses and more exotic currencies).