Diversification of your portfolio is crucial when it comes to risk management. It is wiser to rely on multiple options while investing rather than keeping all your money attached to one asset. This way, you can cover any loss or at least minimise them, which will allow you to keep trading.
However, it’s essential to choose the trading instrument and asset for your portfolio wisely. Forex is considered one of the most popular trading instruments when it comes to that task - let’s see why it is so.
What is a diverse portfolio anyway?
The experts offer four main types of trading instruments that make up a proper portfolio:
We could refer Forex to short-term investments due to the variability of trading timeframes - you could get your profit within a day or a few months of keeping your order open.
What type of advantages does Forex have when it comes to adding it to your portfolio?
Enormous trading volumes along with the wide choice of assets has always brought Forex the advantage it deserves. Open 24/5, this market provides traders with infinite possibilities to profit.
Constant liquidity of Forex assets is another pro in this situation. Forex traders can go with long or short positions and close them anytime they like, instantly getting their results - this option, however, is not always available when it comes to other trading instruments.
The volatility of certain assets is also something you can profit from, especially if you seek short-term investments and use day trading strategies.
So how do you introduce Forex pairs into your portfolio?
There are three major categories of assets you can use to diversify your trading and manage your risks.
Major currency pairs
Those are considered EUR/USD, USD/JPY, GBP/USD, and USD/CHF - the currency pairs with the most traded volume. Together, they make up to 85% of the market, making them the most liquidity assets. The best thing about having them in your portfolio is relatively low spreads.
- Minor currency pairs
They are often called ‘cross-currency pairs’ and include assets that don’t have USD in them. The most popular among them include GBP, EUR, and JPY. These assets would be a perfect fit for those interested in the related countries’ economy and follow the socio-political situation.
- Exotic currency pairs
Exotic currency pairs often consist of USD and a national currency of a known country with a smaller economy globally. This type of currency pairs may provide you with the perfect trading opportunities if your strategy includes a ‘high risk, high reward’ policy.
Pro-tip: mind the correlation
Correlation is significant when it comes to the choice of assets for your portfolio. Correlation is the measurement of the degree or extent to which two separate numeric values move together. In this case, correlation is the influence between two assets - when the price of one moves, the other’s price follows. If your assets are entirely in sync, it’s 100% - let’s write it as 1.0. If two assets move in opposite directions, then their correlation is -100%, or -1.0. The closer your assets’ correlation to -1.0, the better.
Forex is a great way to diversify your portfolio and make sure that it stays as profitable as possible - consider it while making your investment plans if you go for effectiveness.