How to Diversify Properly in Forex

By Joshua Geralds

We can define Diversification as:

"The means to distribute among several sources, to prevent total losses in adverse conditions"

This means that you as a trader have to take your total account and carefully divide it up into portions for investment. For a forex trader, what that means is that you got to split your position size.

You take your bite sized amounts and trade, that way you mitigate the risk against you. I don't think that you would want to be in the position when you have only one trade, and you lost that trade. What that means for your pocket is that you have now just lost money. If you allow this losing streak to carry on then your aim of making money and a living as a trader will never happen.

Diversification will help you from busting your account. The primary goal of diversification is to take advantage of non correlated sectors to protect a trader's account. Although diversification is not the only way to protect your account, it is a tried tested and proven method. Most professional traders diversify their portfolios shouldn't you do the same as well?

The issue with trading Forex is that we have a lot of uncertainty in the market. The sheer amount of volitality in the market is at once an advantage and on the other hand a huge disadvantage. We as traders will never know when the market will turn against us and when we might make money. Our trading plan is designed to help us increase the probability of success. But as long as there is any chance of failure a prudent trader would guard against that most strictly.

To properly diversify your portfolio here are some tips:

1. Use totally uncorrelated currency pairs. For example you trade the EUR/USD you can choose to portion to another pair that have no relations with either EURO or USD like GBP/JPY. This will save you if one trade goes against you, you have another trade to count on. Of course there is the possibility that both trades would turn against you. Still you have managed to cut your risk level by a potential 50%.

2. Break up your lots. If you are trading a standard lot each time, it is a good idea to break it up to smaller sizes to mini lots. You can choose to trade the same pair with a variety of different lot sizes. For example, you use two mini lots to trade the EUR/USD for a long term plan (1 week) and another 2 mini lots for a day trade.

A word of caution here, while it is good to diversify please do it in moderation. As a trader you must have focus in your trading. Over diversification will only overly complicate matters. That is not good for your account. I would suggest that you mix and match how you wish to diversify your portfolio. Once you have decided on the course of action the next step you have to take is to incorporate that into your trading plan. Have your trading plan all written up nicely and placed where you can see it.

Diversification is one of the important components of money management and is a crucial step in taking you from zero to hero.

Dr. Joshua Geralds is a successful Investment Specialist with over twenty years experience increasing the income of people world wide. Visit http://www.pipsalot.com to learn how to make steady profits through safe trading and down load your FREE e-book "Money Management" for a limited time only!