How to Safely Diversify your Trading Portfolio

diversify trading portfolio

Portfolio diversification means spreading your investment across various assets with the intention of taking advantage of different market opportunities.

Diversifying can be a powerful tool for protecting accounts and generating profits when implemented smartly and technically.

Here are ways to safely diversify your trading capital:

1. Know your risk tolerance

Your risk appetite (knowing how much you’re willing to lose) should drive your decision here. It should guide your positions; help you strategically allocate your capital.

If you have a high tolerance level, you may be comfortable with spreading your funds across multiple volatile instruments or do the opposite if yours is low.

Knowing your capacity or what you can handle can help you make informed decisions (choose the right pairs and position sizes for your diversification strategy).

2. Consider correlation

Before you spread your investment, you must first understand if your chosen assets correlate (that is, if they influence each other positively or negatively).

To be on the safe side, don’t pick currency pairs that move in tandem (in same direction). Work with pairs that move in opposite directions.

Select currency pairs with weak or zero relationship/”connections”.

Include non-forex assets such as crypto, indices, energy, etc.

3. Utilize different trading strategies

A trading system that is productive on pair X may not be effective on pair Y.

Find what really works on each market.

You want to utilize the most suitable strategy for each financial class.

4. Balance high and low risk trades

Allocate small positions to highly volatile, high reward instruments, and large portions to less choppy markets with a high probability of profiting.

This way, you play safe in case some of your trades go south.

I recommend you use this strategy if you have a strong trading experience.


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