How to Diversify Your Forex Portfolio
As a trader, you may have encountered the term “diversification” at some point, but what does this mean? When you diversify your portfolio, you spread out your investments into various assets and sectors. With these variations, losses are minimised, and assets are protected. When one of your assets is experiencing a decline or downtrend, another investment in an uptrend can prevent you from losing too much. Diversification is important for a sound investment or trading strategy, and it applies to forex trading as well. The forex market is one of the best for diversification, with many opportunities for high returns when you trade wisely. Here’s how you can diversify your forex portfolio:
Trade a mix of currency pairs
Investing in various currency pairs is a good way to diversify your forex portfolio, as there are hundreds of pairs available for you to trade. You may feel safer trading with ones involving the US Dollar (USD), the strongest and most prominent currency in the world. However, putting all your eggs in one basket can be risky, and you can lose significant profits from trading other pairs. Trading a range of currency pairs with varying levels of volatility. Awareness of forex assets classes—major, minor, and exotic—can help diversify your portfolio.
Major pairs include the Euro/US Dollar (EURUSD), British Pound/US Dollar (GBPUSD), and US Dollar/Japanese Yen (USDJPY); these always involve the USD and are the most traded or active currency pairs. Examples of minor pairs are the Australian Dollar/US Dollar (AUDUSD), New Zealand Dollar/US Dollar (NZDUSD), and US Dollar/Norwegian Krona (USDNOK). Other pairs comprise the USD and other emerging currencies from smaller economies, such as the US Dollar/Hong Kong Dollar (USDHKD) and US Dollar/Mexican Peso (USDMXN). Trading various classifications of currency pairs for diversification can lead to higher reward opportunities, especially when dealing with volatile currencies, but it can also mitigate losses with the help of more stable pairs.
Pay attention to different trading hours
Diversifying your forex portfolio not only involves what pairs you trade, but when you conduct online trading as well. The forex trading hours are typically Sunday 21:05 to Friday 20:59, but some currency pairs have their own trading times, which you can experiment with and take advantage of. The trading hours for the US Dollar/Chinese Yuan (USDCNH) and the US Dollar/Thai Bat (USDTHB) open on Sunday at 23:05 and close Friday at 20:59, while the US Dollar/Israeli New Shekel (USDILS) and the British Pound/Israeli New Shekel (GBP ILS) open on Monday at 05:00 and close Friday at 15:00.
While there are optimal times for forex trading, executing trades at only certain times of the day won’t do much to help diversify your portfolio. Trading in other windows can open new opportunities and maximise returns on various currency pairs. Keeping different forex trading hours in mind can give you a chance to experiment with different pairs and times to see which generates the best returns.
Utilize various strategies and timeframes
Your trading strategy can be crucial for tipping the odds in your favour. You may be comfortable sticking to one system and timeframe, such as intraday trading based on increments of a few minutes and using daily charts to read price changes—which is typical for beginners in forex trading. However, the trades you make based on daily changes may not always yield high returns, as the shorter timeframe doesn’t show the bigger picture. While you don’t have to give up on the strategies and timeframes that work for you, utilising others can help you be smarter with your trading decisions while diversifying your forex portfolio.
If you started with or usually do intraday trading, you can experiment with a weekly forex trading system. Working with a bigger timeframe can reveal a larger overall trend, which can help you trade with it and avoid losses from trading on minor shifts. You can use momentum trading to capitalise on a larger, consistent rising or falling trend until a major market or economic event changes the direction. A scalping strategy is also another option. This system involves buying or selling currency pairs and holding trades for a short time to make quick profits. Trading in a minute timeframe is usually best for reacting to swift market changes and making quick decisions. Considering the above factors, like currency pair classifications and trading hours, can help you determine which strategy and timeframe work best.
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