October 21, 2013

Reasons to Not Diversify Your FX Trading

This article looks at the reasons why you should not be diversifying your FX trading.

FX Trading Diversification

There are a lot of traders who feel that once you have experience on the market you should diversify your FX trading.  This is something that often works on other financial markets, but there are a number of reasons why you should not diversify your FX trading.  It is important that you know what these reasons are before you try to diversify.

The Capital Amounts for FX Trading Diversification

Something that a lot of traders do not consider is the monetary cost of diversification.  When you are trading more currency pairs or with more strategies you are opening more trades.  This means that you are putting more of your capital into the market and lowering the trading account balance that you have.  While you do not have to pay a transaction fee on the forex market you still have to cover the spreads that you are charged.

When you spend more of your trading account on the market you will have less to buffer the moves of the market.  This means that you have to set tighter stop loss orders and use a lower amount of risks.  This could actually change the entire trading strategy that you have and the profits that you are looking to make.

Diversification is Time Consuming

When you are trading more you have to complete more analysis of the market.  There are two ways that you can diversify your FX trading and you have to consider the time that is required for both of these methods.  If you trade more currency pairs then you have more currencies to analyse.  This can lead to more time being spent on analysis than actively trading.

The other method of diversification is to have more than one trading strategy.  When you have more than one strategy you have to change the way that you analyse the market.  This moving between analysis methods and techniques takes time and you could be missing trade opportunities that you would have seen if you did not diversify your trading.

Diversification Can Limit the Trading You Do

When you diversify you are going to be increasing the amount of money on the market and decreasing the amount you have in your trading account.  This will not only increase the risks of trading, but limit what you are able to do on the market.  When you have lower amounts in your trading account you are going to have to use smaller lots.  This can lead to lower profits because your strategy had been based on the larger lots that you can use.

The risks that you take will need to be lowered as well because you no longer have the buffer you once did.  This means that the leverage amounts that you have been using are no longer viable.  There are many traders who make all of their profits from the use of leverage.  When they lower the amount of leverage that they use then their trading strategy is no longer as profitable or profitable at all.  It is important that you consider these repercussions of diversification before you do this.



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