Thu. Apr 2nd, 2020

Forex InfoBook

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Understanding Diversification and Correlation

There is no “Holy Grail” strategy which can guarantee profits every day, week or month. Traders can achieve reasonable gains consistently by building a portfolio of well diversified strategies to trade uncorrelated currency pair to reduce risk.

Diversification manages risk by using several strategies and instruments within a portfolio.  A portfolio consisting of different kinds of strategies and instruments will yield higher returns and lower risk of drawdown than any individual strategy in the long run. Trading currency pairs with different correlation levels can reduce the overall risk of a portfolio. For example, the most common way to diversify in a forex portfolio is to include pairs that trade different base currencies and pairs representing different asset classes like commodities or metals.

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