Creating a diverse portfolio is one of the best ways to make money whilst travelling the world, and getting started is easier than you might think.
In this guide, we’ll provide more information abotu trading, explore the importance of forex and how to ultimately create a balanced, profitable portfolio for your trading strategy while you explore the globe.
The importance of diversification in forex trading
Diversification is central to managing risk. With the forex markets being notoriously volatile, investing in a single currency pair can expose your portfolio to significant losses if that pair moves against you.
By spreading your funds with a comprehensive platform like Tradu, you can reduce the risk posed by any one currency’s performance. A diversified portfolio allows you to take advantage of different market conditions and varying economies, increasing the opportunities for profit while lowering overall exposure.
Balancing risk and reward in your portfolio
When building your portfolio, it’s essential to strike the right balance between risk and reward. Major currency pairs should form the core of your trades, providing greater stability and lower risk.
- Major pairs, such as EUR/USD and GBP/USD, involve currencies from the world's largest economies (one usually being the US Dollar (USD)). These pairs are highly liquid, with tight spreads and lower volatility, making them a relatively safe choice.
A smaller percentage can then be allocated to minor and more exotic pairs, which can return more but come with increased risk. This blend helps ensure that your portfolio isn’t overly exposed to any single currency or market.
- Minor pairs, like EUR/GBP and AUD/JPY, do not involve the US dollar but still come from strong economies. These pairs offer more volatility than majors but with manageable risk.
- Exotic pairs, such as EUR/TRY or USD/ZAR, involve currencies from emerging markets. They offer the highest volatility and increased risk due to lower liquidity and wider spreads, but greater potential returns.
Hedging strategies to reduce risk
Hedging is a popular strategy for reducing risk in the forex markets. By opening opposing positions in the same currency pairs, you give yourself a better chance of offsetting potential losses. This is particularly effective in times of economic uncertainty.
Leveraging different time frames
Another way to diversify is to incorporate different time frames into your overall strategy. Short-term trades, such as scalping or day trading, offer quick opportunities for gains, while longer-term positions help capture larger market trends.
Mixing time frames can stabilise returns and reduce the impact of short-term volatility on your portfolio.
Regular monitoring and rebalancing
Markets constantly shift - so should your portfolio. Adjusting your exposure to different pairs as market conditions evolve keeps your portfolio well-balanced and aligned with your level of risk tolerance.
Regularly review performance, monitor market trends and rebalance when the time is right.
