October 16, 2013 at 06:17 AM EDT
Diversification in Forex Investing
While diversification is a term commonly used about an overall investment portfolio, and certainly when considering investing in stocks, it is seldom spoken of when discussing Forex trading. This is beginning to change, particularly since the recent political issues in the US. The USD is paired against nearly all other currencies, as well as the Gold and Silver used as a major pairing in the Forex market.

With the discussion of the possibility of default of the US, many investors have become wary or trading in multiple pairings containing the USD. Any bad or good news has the tendency to push the USD higher or lower in all of the pairings at the same time.

Since the good or bad news has been a mixed bag and very unpredictable, investors trading in multiple pairings have to choose a single forecast for the USD and apply it to all of their pairings. This puts them in the position of an incorrect forecast causing a potential loss on multiple open positions. Depending on just how strong the news is, choosing the wrong side of a pairing which includes the USD could be catastrophic. Even judiciously placed stop loss points are not completely safe when very large fluctuations and volatility are at stake. Remember while brokers will try to place your order, if they cannot you are still liable for any slippage when they actually do get the trade completed.

This situation makes an excellent case for diversification in the Forex market. Just like in the stock market when most people would feel more secure holding 1000 stocks from 10 companies, rather than 10, 000 stocks of one company and Forex investor may be able to reduce the risk of a single currency like the USD by choosing pairings that do not include the USD to diversify.

Since the USD is used in so many pairings, there are limited options available but they do exist. In the Major Pairings traded by virtually every broker, (the most common MT4 platform offers 39 pairings) you can select four pairings with not more than one containing the USD. As an example, USD/CAD, AUD/NZD, GBP/JPY, and EUR/CHF are all pairings that you could look at while limiting your exposure to the USD. While this type of diversification is cutting out the most commonly traded pairings, it is also reducing your risk of being exposed to a single currency in all of your positions.

When considering diversifying into other pairings you are less familiar with, it is imperative you do some research on the pairing. The technical indicators you have set on your trading platform that have served you well when trading a EUR/USD pairing may be much less accurate in forecasting a pairing of GBP/JPY. Before taking a position on an unfamiliar pairing looking at the charts and overall trends for the past few weeks and reading the regional news for those areas would be advised.

When diversifying to new or different pairings many investors can benefit from large social trading networks as well. These larger global networks will often have investors that are experienced in these slightly less common pairings that you can learn from.

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