Portfolio Diversification

Forex Portfolio Diversification: The Secret to a Stronger Forex Portfolio

Every successful investor knows that diversification is the key to a profitable investment portfolio. However, we want to take it a step further and emphasize that successful diversification doesn’t necessarily require a wide variety of assets. Taking it from an absolute investing genius Warren Buffet, diversifying within one asset class will probably get you better results more quickly. You must, however, choose an asset carefully. In this regard, Forex portfolios are among the most popular – let’s see why it is so! 

What Is Portfolio Diversification?

portfolio diversification strategy involves spreading your capital across a range of investments in order to mitigate financial risks. The term ‘well-diversified portfolio’ refers to a portfolio that combines a wide variety of investments. The conventional wisdom is that investing in a diversified portfolio reduces overall risk more effectively than investing all your money in one company, one industry, or one asset type.

This strategy, however, has one major disadvantage, which is the fact that most investors are not proficient in a wide range of asset classes, but only a few. This is where forex trading has an edge over other assets and averages $6.6 trillion worldwide trading volume every day. A forex portfolio offers a great deal of scope for diversification and profit-making opportunities as opposed to trading stocks, metals, or commodities. Furthermore, forex is the most liquid market in the world, making it possible for even an amateur to trade on it right away. 

How Forex can spice up your Portfolio Diversification?

The concept of investment diversification is something that every trader should think about when setting up a portfolio. People often discuss forex when discussing portfolio diversification, and there are many good reasons for this. When speaking of a forex portfolio, you can trade an enormous range of currency pairs along with a wide variety of assets that include Stocks, Crypto, Indices, Metals, Energies, and Commodities worldwide to earn profits.  

If you engage in other forms of trading, you will only be able to trade during certain market hours. While other markets are down, forex provides 24-hour trading, allowing you to remain diversified while also keeping your trading activities active. Due to the fact that forex is also the most liquid market in the world, any trader can trade both long or short freely and profit regardless of market conditions. Those who are inclined to take risks can also take advantage of an emerging currency’s high-yield exposure. 

There are many ways in which you can add spice to your portfolio through forex, whether you are investing in an individual asset or just a currency. Forex trading can be just the thing you need to keep your portfolio balanced since it has depth and profits returns that are hard to match. 

The Diversification of a Forex portfolio

A forex portfolio will only perform better and have a lower risk of losing money if you trade a variety of currency pairs and assets since each pair will have its own risk and return profile. Due to the unique market conditions of each currency in your forex portfolio, if one currency goes down, it does not necessarily mean that your entire investment will also go down. Since currencies have a strong correlation, forex trading markets offer ample opportunity for diversification.  

It is important to understand the concept of correlation in order to fully appreciate the benefit of a well-diversified portfolio. Correlation is the tendency for two currency pairs to move together. An excellent forex portfolio should, in fact, consist of a number of pairs related to one another. Calculating the correlation coefficient between pairs within a forex portfolio determines what level of risk it entails.  

Currency pairs are influenced by various fundamentals and technical factors that affect their exchange rates. Factors such as economic policies, political stability, trade flows, and changes in supply and demand all contribute to these factors. Pair names are abbreviations of currency names and country names. The USD/JPY currency pair, for example, represents the US Dollar against the Japanese Yen. 

Positive correlations occur when both pairs move in the same direction (e.g., both rise or fall), and negative correlations when one currency moves one way and another in the opposite direction (e.g., one security falls and the other rises).  

Forex portfolio diversification relies on the unwritten rule that the more pairs used, the more likely it is to beat the reference benchmark. A portfolio’s returns are independent of one another if the pairs are as uncorrelated as possible. The process of diversifying involves evaluating the correlation between currencies and market scenarios and selecting a defined time horizon. With a few well-selected pairs, you can build a successful forex portfolio. Moreover, it is very important to know how to choose pairs based on risk and return targets when diversifying.

Most Popular Currency Pairs in the Forex Market

Despite the fact that forex trading involves dealing with the entire world’s currency supply, there are some currencies that possess a dominant position. Identifying the ideal trading pairs is essential for beginners to build a profitable forex portfolio. The list goes like this. 

1. Major Currency Pair – Ideal for Beginners

The major currency pairs in the forex portfolio come from the most stable, prosperous economies around the world and offer low spreads that accurately reflect market prices, making them especially attractive. The major pairs are the best if you want to diversify your forex portfolio since they carry low exposure. The 7 major pairs are EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/CAD, USD/CHF, and USD/JPY. As a matter of fact, EUR/USD is the most traded pair. Globally, the pair accounts for approximately 30% of the six trillion forex transactions. 

2. Minor/Cross Currency Pair – One doesn’t involve USD

The minor currency pairs are forex pairs that don’t trade against the US dollar. Spreads are a bit wider on cross-pairs. Despite being sufficiently liquid, they are not as liquid as major pairs. There are a number of emerging cross-currency or minor currency pairs that have made diversification of the forex portfolio simple and straightforward. Some of the most active minor pairs are the Japanese Yen (JPY), the European Euro (EUR), and the British sterling pound (GBP). Monitoring them is worth the effort. 

3. Exotic Currency Pair – Emerging market currencies

The exotic pairs consist of the US dollar (USD), along with other emerging currencies. What are emerging currencies? They are currencies from smaller economies worldwide. Exotic currency pairs are those that emerge outside the Euro economy. Due to the fact that these pairs are less traded, their trading costs are higher. Another aspect is their extreme volatility. Investing in this involves high risks, but also high rewards. 

On an operational level, a trader must follow the following rule: the higher the capital invested in different currency pairs, the lower the risk incurred. This requires taking into account the degree of correlation between the pairs making up the investment, as well as the time frames involved. 

Diversifying your Forex portfolio with Varied Assets

When it comes to building a well-diversified forex portfolio, it’s essential to include the best revenue-generating assets. Diversifying your forex portfolio across different asset classes is a good way to protect yourself from unsystematic risk (avoidable risk), control systematic risk (unavoidable risk), and ultimately build a portfolio that is likely to be more profitable and stable. 

Why Should You Consider Foreign Currency as an Investment

As many forex brokers offer traders a wide range of assets, making a profitable forex portfolio has now become easier than ever. Let’s take a look at them one by one. 

1. Trading Metals with Forex

Besides trading major currency pairs, you can also diversify your forex portfolio by trading precious metals like Gold, Silver, Aluminium, Copper, etc. In this case, the price is quoted in US dollars. An example of a forex pair is XAU/USD, which represents the USD and Gold.  

The fastest-growing forex brokers like AximTrade allow you to trade up to 9 metals as a way of diversifying your forex portfolio. Metals available for trading at AximTrade include Gold, Silver, Aluminium, Copper, Zinc, Nickel, Lead, Palladium, and Platinum.  

Read Top Gold Trading Tips and Strategies for tips on how to trade gold and make your forex portfolio profitable. 

2. Trading Stocks with Forex

While stock trading is among the riskiest investments, it is also among the safer ones. The strategy allows you to invest in diverse companies and profit from rising values while maintaining a steady cash flow. Forex traders can speculate on the future market movements of an underlying asset without having to own the asset or take delivery of it physically. 

With a wide selection of over 70 stocks available at your fingertips, traders at AximTrade can enjoy unlimited access to a wide selection of global stocks, with the lowest spreads, in real-time. If you’re a novice in forex and finding it difficult to take advantage of market movements, you can try AximTrade’s leading Copy Trade platform and start trading like a pro from day one. 

3. Trading Crypto with Forex

Crypto trading is a very attractive option for traders who want to profit from price movements without having to deal with the technical process of purchasing and storing cryptocurrencies. Crypto trading pairs are essentially two currencies users can trade with each other on exchanges. The BTC/USD pair, for example, consists of Bitcoin and the US Dollar. 

Cryptocurrencies are plentiful on the crypto market, each with its own unique potential features. So, if you are looking forward to diversifying your investment portfolio wisely, cryptocurrency should certainly be on your list. AximTrade offers 59 crypto trading pairs intended to enhance forex portfolio diversification. Open a forex account in a few simple steps and start trading cryptocurrency easily through AximTrade accounts. 

As well as offering Forex, Stocks, Crypto, and Metals to its traders, AximTrade also provides an opportunity for traders to trade a variety of Energies, Indices, and Commodities to diversify their forex portfolio. AximTrade also allows clients to have up to 15 active trading accounts at a time, which include 7 Standard Accounts, 2 Cent Accounts, 5 ECN Accounts, and 1 Infinite Leverage Account.

The choice of a reliable forex broker is one of the most crucial decisions in creating a profitable forex portfolio. This AximTrade review will assist you in making the right choice.

Why Choose Forex as a Diversification Tool? 

Once you decide that it’s time to diversify your portfolio, there are plenty of options to choose from. However, if you really want to give your portfolio a boost, then forex is the way to go. The ability to work in a market that’s open 24/7, with a level of liquidity that other types of investing can’t match, the ability to be long-term and short-term, and portfolio diversification with forex is something you cannot afford to overlook if you wish to build an investment portfolio that is diverse, effective, and profitable.  

If risk diversification is a way of mitigating the risk of a big loss in case the market drops suddenly, each currency pair in your forex portfolio represents a different market, and the correlation between these markets lends an adequate level of scope for diversification. 

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