In the past I have taken setups occurring in correlated currencies, however recently I insist against this. For example, say I am in a trade Eur/Usd, now, for as long as I am in that trade I will NOT take any trades that are setting up in any of the Eur or Usd pairs. The way I see things now, I am better off trading more size in my original Eur/Usd trade instead of adding more risk by taking on any other Eur or Usd related trades. I would appreciate any thoughts anyone might want to share on this.
I focus solely on the Eur/Usd since I share the same mindset. If you can make money with just one pair consistently, just up your ante and you make more. I get way too distracted by trying to following multiple pairs. Perhaps that's just a mental defect of mine? Although I do have the other major pairs up just to be aware of what price overall is doing.
Well, harry markowitz wrote about why you guys theory is wrong on not diversifying. Your trading strategy has to have drawdowns, which are a function of your risk level per trade. If you are diversified, you can take on more risk that if you are not because your diffrent positions should offset each other. For example, lets say that your strategy is going through a bad period on eur and your risk is 2% per trade and you have 10 losses, you are down a wopping 20%. If you have 10 different currencies at 0.2% risk each, they will offset each other and you will still have the payoff of taking the 2% risk on just eur but with dramaticaly lower risk. In fact you will realise that by trading just one currency you risk per trade has to be much lower than a diversified portfolio as you will see ruin soon enough. This is not a debate but fact. Regards
Hi, I'm not implying that I only trade Eur/Usd. What I'm getting at is that whereas before I would go long Eur/Usd, Gbp/Usd and Aus/Usd (for example) at the same time if I got the setups, now if I have a trade in Gbp/Usd (for example) I will not take any trades in the Gbp or Usd crosses. If the Usd (for example) is making a move then attractive setups will appear in Eur/Usd, Gbp/Usd, Aus/Usd etc ... and it is very tempting to take all of them but from a money/risk management perspective it is dangerous to do this I feel. Just wondering what other traders think about this?
Not really, if your portfolio is adjusted for the correlation amongst these pairs, then you will not be increasing your risk by trading all of them. Also, these currencies may all be heading in the same direction but they follow different paths to that destination, therefore you may be stopped out on a couple and not on the others. You can also not know whether the movement is due to the dollar or the other currency example gbp, e.g gbp's movement against the dollar vs euro's over the last 4 months. Your issue is really an aspect of portfolio management and not trading per se`.