Why Trade Multiple Pairs? | Forex Factory

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Why Trade Multiple Pairs?

  • #1
  • First Post: Aug 29, 2013 10:59pm Aug 29, 2013 10:59pm
Something I have struggled with throughout my trading career is why should you trade multiple currencies at once? If the ultimate objective is to make money, does it matter how that is done? Does it matter if you do it via EURUSD, NZDUSD, Oil, AAPL etc?

I guess the question I wonder about is, it seems as if the more I try to trade multiple products and currency pairs at once, the less efficient and profitable I am. For example I am currently short EURUSD in a very large in the money profit I hope to continue to add to. I also just noticed a set up in AUDUSD I like. The question is, why should I expand the amount of products I am trading if I still will likely make money either way. The less I try to trade other currencies and asset classes, the more focused I can be on my one trade that has the potetial to double or triple my net worth?

Anyone else have thoughts on focusing on one product versus several?
Twitter: @TrendersGame
  • #2
  • Aug 29, 2013 11:23pm Aug 29, 2013 11:23pm
Diversification.

Trading is not only about profit, it is also about largest drawdown. You can have 3000 pips profit in a particular period, but if during that time you have 2500 pips largest drawdown, your equity must be larger than 2500 pips. Let's say to make it safe, you need twice of your lifetime largest drawdown, then you will need 5000 pips equity. Now you can see how small your 3000 pips compared to 5000 pips equity. This will force you to open in smaller position size.

Diversification will help you to reduce your drawdown or increase your position size without having to increase your equity. The reason is because largest drawdown of every currencies you trade (almost always) will not happen at the same time. However, you still need to make sure that your trading system make profit on every currencies you trade.

Back to example I gave. If you trade 4 other currencies beside the one that give you 3000 pip profit and 2500 pips largest drawdown, let's say you make 2000. 2500. 1000, 1800 pips for each currencies and have largest drawdown 1500, 2000, 1000, 2000.

You can add your profit, 3000 + 2000 + 2500 + 1000 + 1800 = 10300 pips.
Will your largest drawdown become 2500 + 1500 + 2000 + 1000 + 2500 = 9500? Fortunately not, because those largest drawdown will not happen at the same time. Let's say the the largest drawdown is become 4000.
Count your account base on your drawdown, 2*4000 = 8000.
Now your system will produce 10300 pips with 8000 pips equity, compare that with your previous result, 3000 pips with 5000 pips equity.
  • #3
  • Aug 30, 2013 12:00am Aug 30, 2013 12:00am
Quoting Special One
Diversification. Trading is not only about profit, it is also about largest drawdown. You can have 3000 pips profit in a particular period, but if during that time you have 2500 pips largest drawdown, your equity must be larger than 2500 pips. Let's say to make it safe, you need twice of your lifetime largest drawdown, then you will need 5000 pips equity. Now you can see how small your 3000 pips compared to 5000 pips equity. This will force you to open in smaller position size. Diversification will help you to reduce your drawdown or increase your...
What about infinity TIMES infinity?
  • #4
  • Aug 30, 2013 12:06am Aug 30, 2013 12:06am
In my opinion diversification is the mother of all evil :-). I prefer to focus on single pair, study it to the bone with trading experience and then leverage as much risk as deemed wise to achieve profits with this instrument. My motto is "Do not pour out everywhere, but focus!".
  • #5
  • Aug 30, 2013 12:19am Aug 30, 2013 12:19am
For a couple of years now, I have shorted the Euro/USD when I saw opportunity , gone long on the AUD/USD , and short on the CAD/USD, staying out of the pair when the trend goes the other way. This mix seems to work for me. There is a strong,though on -and- off, positive correlation between the first two pairs. So when the Euro is going up, I can usually play long on the AUD with profit. When the USD news is good, its smaller trading partner to the north, can expect to profit even more. The players also seem to know when the Canadian news is going to be good. So I check the pair around 7:30 E.S.T. : if it is going down, I hop aboard for the ride, rather than wait for the news, when the spreads grow larger and timing becomes an issue.

By Staying out when the market is signaling the wrong way, I reduce the frequency of my trading, and develop a feel for the side I have taken. (You may notice that sometimes the market just chugs uphill, but plunges going down). I have tried trading more pairs than this, but found myself getting to busy to take well studied, quality trades.

That is my troika.
  • #6
  • Aug 30, 2013 12:54am Aug 30, 2013 12:54am
Hello guys, I don't want to say it is bad or its good to do multiple trade but I think it depend on you and your trading system. A good trader take note of two important things the relation between you and your developed system. There must be agreement between what you create and yourself. If you are able to have 100% agreement with your system, you are at right track to being a successful trader. I guess multiple pair is strictly for scalpers who are strictly under the influence of a programme Robot or indicators; a kind of up and down arrows with a set rules. A price action reader who believe strongly that Market is always talking and the language is gesture needs allot of attention to seeing the face of the security. A good price action reader sees faster, clearer and more than any indicator. That is why you need a plain chart on with price. Hence, it is unprofessional to bring diversification into the system of F.X trading. ''I don't make friend but I keep friend more than anybody''. Is of no importance to have 100s of people around and no one is a good friend instead have one,study him or her and learn to live with him or her. thanks
palmpurse
  • #7
  • Aug 30, 2013 1:26am Aug 30, 2013 1:26am
Quoting Citiboy
If the ultimate objective is to make money, does it matter how that is done?
No, it doesn't matter......so you answered your own question!!!
Doing what you like is Freedom. Liking what you do is Happiness.
  • #8
  • Aug 30, 2013 4:23am Aug 30, 2013 4:23am
It doesn't matter if you focus on one asset or a bunch. More importantly focus on one trading system you modified and developed yourself to match your mentality. That's all.
Winners never quit and quitters never win. Vince Lombardi
  • #9
  • Aug 30, 2013 11:29pm Aug 30, 2013 11:29pm
One word: Correlation
Make your losses in demo. Earn your profits live.
  • #10
  • Aug 31, 2013 1:15am Aug 31, 2013 1:15am
Quoting Forexia
One word: Correlation
By reading the very 1st post, I was going to replay the exact same thing!
MT4/MT5 EAs/Indicators/Alerts coder
  • #11
  • Aug 31, 2013 5:48am Aug 31, 2013 5:48am
Quoting Citiboy
If the ultimate objective is to make money, does it matter how that is done?
If it was just to bring eggs a single big basket to put them all would suffice. But you also want the eggs not broken.

The ultimate objective is not to make money but to make money using as few risk as possible. Making money is not the goal, it's just the natural consequence of a working trading methodology.

Personnaly --but that's just me-- I select the 3 strongest and the 3 the weakest currencies to build a basket of 3 pairs in such a way that a strong currency is against a weak one and the correlation within the basket is the smallest. (my watch list)
Other people will select the correlation to be the strongest to play mean reversion, others will trade two weak currencies expecting a range...
"Which pair(s) to trade?" is an integral part of your methodology.
No greed. No fear. Just maths.
  • #12
  • Aug 31, 2013 6:28am Aug 31, 2013 6:28am
Quoting Citiboy
(...) The less I try to trade other currencies and asset classes, the more focused I can be on my one trade that has the potetial to double or triple my net worth? Anyone else have thoughts on focusing on one product versus several?
Forget multiple pairs question. Think instead about what you've wrote (in bold).
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #13
  • Aug 31, 2013 9:58am Aug 31, 2013 9:58am
Correlated pairs are useful in that if you see something happening in one pair, you can guess what is happening in others. It is good to watch more pairs than just the one or two you trade. Sometimes you are just sitting in one pair, when you can be making a lot of money in another pair. It is also good to check multiple time frames when you are getting ready to enter.
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that quick look may change your mind!
  • #14
  • Sep 1, 2013 11:41am Sep 1, 2013 11:41am
I look at this very simple, we have several major currencies in Forex. Each one has its own story, we are simply pairing up the strongest against the weakest. For example, EUR/USD will fall when another spark of fear come out of EU, but a better trade might be shorting EUR/CHF or EUR/JPY because of the safe haven bids.
We are all told to focus on one pair when we are begging to learn about Forex, which makes total sense. But as we learn more and more about Forex, I think it would be advantageous to consider each currency as a distinct financial instrument.
Like the previous posts stated, you are seeing another set up in AUD/USD because the USD strength we are seeing at this point as the market is expecting the Fed to taper very soon.
  • #15
  • Sep 1, 2013 4:27pm Sep 1, 2013 4:27pm
Personally I trade multiple pairs on both long and short term charts and the reason for this is that it allows me to focus on taking only the best setups. When I was new to this game I did go through the phase of "I only trade <insert favourite pair here>" but I found that by doing this in many cases I was settling for a trade that was less than perfect because I was getting board waiting.

By trading multiple pairs I get plenty of opportunities to trade which in turn ensures I do not take trade out of boredom and only trade those that really make sense.
  • #16
  • Sep 3, 2013 5:26am Sep 3, 2013 5:26am
Quoting Citiboy
Something I have struggled with throughout my trading career is why should you trade multiple currencies at once? If the ultimate objective is to make money, does it matter how that is done? Does it matter if you do it via EURUSD, NZDUSD, Oil, AAPL etc? I guess the question I wonder about is, it seems as if the more I try to trade multiple products and currency pairs at once, the less efficient and profitable I am. For example I am currently short EURUSD in a very large in the money profit I hope to continue to add to. I also just noticed a set...
I think the trading will be sound complex then. Managing four trades at a time, you may be excited if you experience loss in 2 or 3 trades. And tough to analyze the four types of pair at the same time.
  • #17
  • Last Post: Sep 3, 2013 7:37am Sep 3, 2013 7:37am
Sometimes when you trade more that one pair the pair you correlate ( I have in mind Euro or Aud against USD,bear euro, bull Aud) breaks correlationship in your favor. Both the Euro/usd and Aud/usd have made me a nice bit of money monday, and continue to do so today . You should recognize when this is happening, and make hay while the Sun shines . Usually you have to pick one and stay away from the other, and sometimes you should stay away from both.

I combine trading multiple pairs with going only one way on any pair. Usually you can spot better entries and avoid poor ones by going only one way.
I have a third pair, USD/CAD, which I trade as well.(Bear) Today so far, that one is in my favor as well. Take quick profits, check your whereabouts, and get in for more.

Kind of a combination of Scalping and Swing trading. Gives me lots of leeway.

more pairs than that get me too busy. Three seems to be enough for me. In this game when you play with your own money you suit yourself.
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