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Foreign Currency Exchange Over-Diversification

Foreign Currecny Exchange Diversification

When you trade on any financial market you will be told to diversify your trading in order to take full advantage of the market.  While this can help you when you trade it can also lead to over-diversification.  There is also the fact that you should not always diversify your trading on all the financial markets.  If you are looking to diversify on the foreign currency exchange you need to carefully consider this.  You should look at whether you can diversify your trading, whether you should diversify your trading and how this can be done.  You should also consider how you can tell if you have over-diversified.

Diversify on the Foreign Currency Exchange

There are a lot of people who feel that it is impossible to diversify your foreign currency exchange trading.  This is not true as there are two common ways that you can diversify your forex trading.  The first way is to include more currency pairs in your trading and the second way is to use more than one trading strategy.

Should You Diversify?

Trading on the foreign currency exchange does not actually require the diversification that other financial markets need.  In fact many traders feel that diversifying your forex trading is actually a bad thing.  The more currency pairs you are using the more analysis you have to do and this can lead to missed trade opportunities.

The use of more than one strategy can also cause problems for people trading on the forex market.  If you are not careful you could use the incorrect signals for the trades.  You could also be using the wrong currency pairs for the different strategies.

How to Diversify Your Forex Trading

When you look at diversifying your forex trading the first way you should look at is to have more currency pairs.  You need to limit the number of currency pairs that you choose because of the risks of trading with too many pairs.  Most traders will only look at 2 different currency pairs.  There are other traders who diversify their currency pairs, but keep a common currency in both of their pairs.

If you are going to be diversifying your trading through the strategies that you use you need to ensure that you use complementary as well as different strategies.  This means that the strategies should be different enough to work at different times, but similar enough for you to be comfortable with.  If you are not comfortable with one type of analysis then you should not have a strategy that uses this analysis type.

Are You Over-Diversifying?

A problem that can easily come about when you diversify your trading is that you over-diversify.  There are a few ways that you can determine whether or not you are over-diversifying your trading.  The first point you have to consider is whether or not you are spending a lot of time on analysis.  If more of your time is spent on analysis than trading you have to consider why this is.  You could be using too many currency pairs and this is negatively affecting your time management.

 

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