The vast majority of forex traders follow portfolio diversification strategies, in order to obtain profitable investments, maximising the return, while minimizing the risk. There are many well-known diversification strategies a trader can use. For instance, the selection of currencies based on the uncorrelated pairs is one of the most famous. The advantage of a diversification strategy is basically to reduce the trading risk. However, some side effects do exist too, as the more diversified the portfolio, the less variation will have.
A trader must bear in mind that over-diversification is never a very good idea. Dividing the trading risk in too many asset classes makes the portfolio insensible not only to future losses but also to potential profits. A diversification strategy is always possible, because modern forex brokers offer their clients to trade on various asset classes from the same trading account: commodities (gold, silver, oil), stock indices, cryptos, and so on. Correlations among these asset classes is the most important variable to take into account to achieve a good diversified portfolio.
The starting point to any money management strategy is understanding the elements of a trader’s account and tools the trader has at disposal. Next, the asset classes to chose. Last, the diversification strategy, that should take into account the limitation of losses (risk) and the maximization of profits (return).
In a money management, diversification strategy, the aim is to make a profit given a forecasted loss. Not to make profits at any cost. Traders aim to diversify their exposure, in such a way that no market move sets the account to zero.
When a trader wants to diversify his forex portfolio, he has to start with the size of the account. The amount per se doesn’t matter when applying diversification strategies, a minimum amount exists. The diversification principle holds for any amount, when trading a one hundred, one thousand or a million-dollar account. Investors use percentages calculated on the account’s size to decide the volume of a trade. This, in turn, affects the diversification method’s exposure and the trading account’s performance.