I see what you mean, but I am diversified as much as these pairs are not correlated. Historically they're correlating around -0.9, so that gives me a little bit of diversification. Certainly not much, but still a little bit at least. And since the technicals look interesting in this pair, I am looking for a long trade in this market to complement my EUR/USD short.
Technically speaking diversification means trading a large basket of non-correlated financial instruments, in the same class of asset (Forex for example) or in different type of assets (currency, bonds, stocks, commodities, etc...) In general, unless you are a "commercial" and you trade strictly for hedging purposes (to protect your business), hedging offers little value to the trader, as you are simply paying another spread/commissions to the broker. A good trade should stand on its merit and simply use the appropriate stop (or options) for downside protection, as the hedge will simply dilute your profits and create an extra expense (double trading fee).
Okay, but what is the point of diversification then (I never understood this completely to be honest) ... Personally I value diversification (as in my idea to sell EUR/USD & buy USD/CHF) so that if I get stopped out in one market by say 1 pip, I still have a bit of chance that the other trade does not get stopped out and maybe turn around into a winner. (similar as with the synthetic stuff we discussed before) If commercials diversify 100 %, then whatever happens, their equity will remain the same? Hmmmmm perhaps that is the point... so they can't get **** by the market. The trading fee is the same. If I add to EUR/USD short or enter a new trade in the USD/CHF market, I still pay an additional spread. I like options to hedge fx trades, but I don't feel ready to mess with this
Pending GBP/JPY order has now been cancelled. Missed the entry point by only 3 pips or so. Too bad, 75 pips would have been in the bag by now.
Closing trade at 0.8152, for 13 pip profit. Now, every pip on the EUR/GBP is the equivalent of 1.7 pips on the EUR/USD for example, so 13 pips in this case equal 22.1 pips. Total since beginning : minus 121 pips (143 - 22).
Well, diversification will allow you to get a smoother, less volatile equity curve and reduce your drawdown.