I was reading Simon's blog where he believes that trading multiple currency pairs is not diversification.  Like he states, going long the GBP/USD, long the EUR/USD, short the USD/CHF, and short the USD/JPY is betting against the U.S. dollar.  If you trade these 4 major pairs, is this diversifying your forex trades or would you be better off concentrating your efforts on only 1 of these pairs? Craig mentions in a comment that he believes that the best course of action is to trade 1 system on a handful of the least correlated pairs.  Simon says that another trader recommends trading multiple systems on 1 pair to diversify.   

I personally have been concentrating on trading the GBP/USD for over 6 months now, but on and off I feel compelled to look at the other pairs, mainly the USD/JPY, EUR/USD, EUR/JPY, USD/CAD, AUD/USD, GBP/JPY, and the USD/CHF.  My thinking was that I didn't want to rely on only the GBP/USD to generate trade signals for me but after reading Simon's post, I'm rethinking this a bit.   I think a combination of the 2 methods above may be my best course of action at this point.  Currently I really only have 1 system that I follow on a daily basis but I'm always on the prowl for more.  I have yet to attempt to regularly apply this to other currency pairs but maybe I should test it on other less correlated pairs.  It may be easiest to put the process in list form as follows:

1. Find a system that gives an "edge" trading the GBP/USD.
2. Find other currency pairs that are least correlated to the GBP/USD.
•  According to Oanda's heat map of currency correlations, the USD/JPY and EUR/GBP are the least correlated pairs to the GBP/USD.  (see heat map below)
3. Test the system on these least correlated pairs.

Is there a better way of diversifying your forex trading other than going outside the forex market to futures, equities, etc? Another thing to think about is whether going this route is neglecting the correlated pairs and the chance that this system may be more successful on them than the GBP/USD?  

Read or add comments about this item.

No. 1 :

I'm starting to think that there is no such thing as the so-called edge that traders are always talking about. Can risk management itself be considered an edge?

Submitted by Frank gamwell • 2007-05-13 22:49:42

No. 2 :

"Can risk management itself be considered an edge?"

My thinking would be no. If you look at card counting in Blackjack...it doesn't matter how well you manage your bankroll, if you don't play with an edge you will never win over the long run (that is, overcome the variability of each hand's return).

In trading terms, each trade has only a small percentage of "edge" built into the result, most of the result is "variance". It's only after making many 100's (1000's ?!) of trades that you can be certain you are trading with an edge.

IMO!

Cheers, Motu

Submitted by Motu • 2007-05-14 21:44:59

No. 3 :

I agree that you need an edge. I think that risk management can be most important in complementing that edge.

Submitted by Rich • 2007-05-14 23:27:24

Please keep your comments brief and on topic, and remember that this is not a discussion thread.
Name :		Website :
Title :
Comment(s) :
Verify :		Please clear the small textbox to show that you are human.