If you’re going to succeed as a forex trader, you cannot get by on instinct or knowledge alone. You’ll also need to develop practical experience as a trader while also creating a keen sense of determinism.
Not only this, but these elements should also help to underpin an underlying forex trading strategy, which allows you to diversify your interests while minimizing exposure and the subsequent risk posed to your capital.
This is why forex brokers are so purposeful, as they offer an array of diversification tools across a range of markets. But what’s the importance of this, and how can you strategize diversity as a forex trader? Let’s find out!
The Importance of Diversification
From a broader perspective, the importance of diversification was borne out entirely during the coronavirus pandemic.
After all, this health and socio-economic crisis has continued to decimate some marketplaces (such as aviation and hospitality) while enabling others (like eCommerce and medical device production) to flourish.
Similarly, the quantitative easing measures to combat the economic impact of coronavirus have weakened various primary currency values, deciding to slash base interest rates particularly damaging for the US dollar (USD) and Euro (EUR).
Such challenges are at the heart of portfolio diversification theory, which encourages individuals to invest in numerous asset classes and market niches to minimize exposure at any given time.
This reduces risk considerably in the process, with the proper asset allocation offering significant value to investors across a range of markets.
The need for diversification is arguably even more pressing during crisis times, particularly as even safe-haven assets can become increasingly volatile within a fixed period.
Gold’s performance reflected this throughout 2020, with the precious metal rising from a low of $1,478.60 per troy ounce on March 19th to a peak of $2,070.05 on August 6th.
How to Diversify Your Forex Trading Strategy?
While forex may be your thing as a trader, any successful diversification strategy requires you to incorporate a broader range of assets over time.
However, the key is to diversify to create a balanced portfolio that offsets the innate volatility and derivative nature of forex with more stable assets such as bonds and stocks.
This way, you’ll minimize the risk of being overly exposed to sudden market movements while also ensuring that you can generate returns from an increasingly wide range of asset classes and interests.
However, this is a delicate balance as you’ll also need to avoid the considerable risk posed by over-diversification. This refers to instances where you spread your investments too thinly, leaving you with minimal exposure to lucrative and high-performance assets.
You’ll need to ensure that you diversify incrementally in line with experience and profitability while restricting yourself to 15 or 20 assets across selected markets. This requires you to adopt a detailed approach to organizing your assets and capital over time.