It’s very important for forex traders to manage their expectations when starting out, especially as it’s estimated that between 70% and 90% of investors lose money in the FX market overall.
However, it’s still perfectly possible to leverage forex and achieve a profitable career, so long as you develop a viable strategy and also unlock the value of diversification over time.
In this post, we’ll ask why diversification is important, and how you can make this a key part of your forex portfolio.
Why is Diversification Important for Traders?
In broader terms, the term ‘diversification’ refers to the process of distributing your capital between alternative asset classes and marketplaces.
Typically, a startup investment portfolio would distribute the majority of funds between stocks and bonds, with a rough, 60-40 split recommended for younger investors.
However, it’s possible to diversify across a far more diverse range of assets and financial instruments, depending on your existing knowledge base, experience and your risk profile as an investor.
But why is diversification important? In simple terms, this process helps to minimise your exposure in the marketplace, particularly the risk posed by volatile entities such as forex and cryptocurrencies.
A diversified portfolio can also offer reliable and incremental gains over time, while accounting for macroeconomic and geopolitical factors that impact specific markets and industries.
Without this type of approach, you may find that you incur more significant losses over time, while also struggling to build any kind of sustainable momentum in the marketplace.
How to Diversify as a Forex Trader
The question that remains, of course, is how should you look to diversify your portfolio as a forex trader?
To begin with, you need to focus on starting small, ideally by targeting just one or two major currencies that benefit from optimal levels of liquidity and typically showcase predictable price patterns over time.
This way, you can begin to build a stable and profitable forex portfolio over time, while utilising risk management tools such as stop losses to automatically close positions once they’ve incurred a predetermined level of loss and minimise your initial exposure.
When it comes to leverage, you should also take steps to cap this in line with your risk profile and starting capital. Remember, even reputable and licensed brokers offer leverage of up to 100:1 to investors, but this can open up potentially disproportionate losses that can completely derail your account.
These steps also demonstrate the importance of controlling your portfolio through a trading account such as the MetaTrader 4, which is central to maintaining success over time.
With this type of account, you can also diversify into alternative asset classes over time, as you look to grow your portfolio in line with profitability and experience.