Why forex is hard to diversify
The dollar is on one side of the majors and in the background of most crosses. Long EUR/USD, long GBP/USD and short USD/CHF is one position, short the dollar, taken three times. Risk appetite ties AUD, NZD and equity indices together. In a crisis nearly everything becomes a dollar trade, and correlations that were loose become tight.
What diversifies
- Pairs that share no currency and no theme, checked against a correlation table.
- Strategies of different kinds: a trend strategy and a range strategy lose at different times.
- Holding periods: a swing book and a day-trading book.
- Markets: gold, an index or a commodity alongside forex, sized for their own volatility.
Counting exposure by theme
Before adding a trade, ask what it is really a bet on: the dollar, risk appetite, oil, a central bank. If the book already holds that bet, the new trade adds size, not diversification, and the risk budget should be shared across the theme.
The limit
A retail account with a few thousand dollars cannot diversify like a fund and should not try. Two or three uncorrelated positions at once, sized properly, is plenty. Diversification is a way to avoid concentration, not a substitute for position sizing.
The course lesson on correlation
Trading forex, CFDs and other leveraged products carries a high risk of losing money. This guide is general education, not advice.