Diversification

Hi all, I'm not a great poster but i read often this forum .

I would like to ask you one thing. I play one pair at the time, and I'm playing eurusd since some months. I would like to diversify... I've tried to look at the other dollar pairs but it seems that most of the time the dollar moves in the same directions against all the currencies, as most of you surely have noticed. For example, trading 10 lots in eurusd and gbpusd is most of the time like trading 20 lots on eurusd, so it's not a good idea for money management.

So I ask you this (to avoid looking to all existing pairs for months): which pair/s are in your opinion the best one/s to diversify my eur/usd trading?

Thank you very much

Nobody?

Pride,

First, this paragraph probably doesn't apply to your question... just thought I would say it anyway, given the title. Diversification is only really important, at least from my findings thus far, if you are "investing" or have a long-term view on markets overall. If you trade on a short TF it wouldn't seem to matter much whether you are in one vehicle heavy or not, as if there is a big shake up out of "no where" it will make strong ripples over every pair, both EUR and USD related, maybe even beyond if it has something to do with a "carry" trade, which then will effect every JPY, NZD and AUD pair.

Having said that, what you are asking I do believe relates to trade opportunities. What is the point of trading GBP/USD when you are already trading EUR/USD? There is the thought that GBP is an important currency to trade, but, again, if you are not investing... the daily differences between the EUR/USD and GBP/USD are not that important. What is important is that stuff moves differently, allowing you to expand. Anyway, diversification in regards to your question would probably be accomplished finding a pair that offers two things. 1) the pair has fair volume and thus a lower spread and 2) has an extremely low amount of correlation to the EUR/USD pair. Those pairs are....

USD/JPY and EUR/GBP

USD/JPY, although a USD pair, has had a correlation of -.16 over the past two years against the EUR/USD. EUR/GBP = .11 correlation. This does mean, again, although same currency, that they move completely different. Sure, you will see days where the USD is weak, nothing can stop that weakness, which will make it show up on both the EUR/USD and the USD/JPY. However, history shows that in terms of diversification away from EUR/USD you should turn to one of those two major pairs.

There are pairs with far less relation, but you would have to go to something such as GBP/CAD to find it.

Thank you very much StockkJay for the information about correlations . Can I ask where can I find these data?

To answer to your question, I want to diversify because I'm not an intraday trader. I use 1H chart as the main timeframe but probably I'll pass to 4H soon.

www.mataf.net/en/tools/correlation-table

This source is used more often than not by casual folks. If you download OpenOffice or have another spreadsheet program, then use MT4s historical data you can create your own correlation charts, which, naturally, will be a bit more precise to your desired criteria.

Again, thank you very much

very good and educational piece covering all aspects. thanks

Mathematically, you can use 'diversification' to leverage time and accelerate your rate of return, without increasing risk, by taking simultaneous (or overlapping) positions in uncorrelated instruments. See here for a detailed explanation.

But alas, the high degree of correlation (or negative correlation) between all of the major forex pairs largely negates this exciting possibility.