It is very important for forex traders to manage their expectations early on, especially since it is believed that between 70 and 90% of investors lose money in the foreign exchange market in general.
However, it is still perfectly possible to profit from forex and achieve a profitable career, provided you develop a viable strategy and also unleash the value of diversification over time.
In this article, we’ll ask you why diversification is important and how you can make it a key part of your currency portfolio.
Why is diversification important for traders?
In more general terms, the term “diversification” refers to the process of allocating your capital between alternative asset classes and markets.
Typically, a startup investment portfolio would split the majority of funds between stocks and bonds, with an approximate 60-40 split recommended for young investors.
However, it is possible to diversify across a much more diverse range of financial assets and instruments, depending on your knowledge base, experience and risk profile as an investor.
But why is diversification important? Simply put, this process helps minimize your exposure to the market, especially the risk posed by volatile entities such as forex and cryptocurrencies.
A diversified portfolio can also offer reliable and incremental gains over time, while taking into account macroeconomic and geopolitical factors that impact specific markets and sectors.
Without this type of approach, you may find that you experience greater losses over time, while striving to create lasting momentum in the market.
How to diversify as a Forex trader
The question that remains, of course, is how should you seek to diversify your portfolio as a forex trader?
To start, you need to focus on starting small, ideally. by targeting one or two major currencies which benefit from optimal levels of liquidity and generally exhibit predictable price patterns over time.
This way, you can start building a stable and profitable currency portfolio over time, while still using risk management tools such as stop losses to automatically close positions once they have suffered a level of. predetermined loss and minimize your initial exposure.
When it comes to leverage, you should also take steps to cap it based on your risk profile and starting capital. Keep in mind that even reputable and licensed brokers offer up to 100: 1 leverage for investors, but it can lead to potentially disproportionate losses that can derail your account completely.
These steps also demonstrate the importance of controlling your portfolio through a trading account such as MetaTrader 4, which is essential to maintain success over time.
With this type of account, you can also diversify into alternative asset classes over time, while looking to grow your portfolio based on profitability and experience.