How Can I Diversify My Forex Trading?

CFD trading gives investors one of the broadest opportunities for making a profit online. There are hundreds of different assets that can be selected, based on your experience level, risk appetite, and scheduling preferences. Each asset responds to a unique set of stimuli, and it is important to research what factors can cause the price to fluctuate. Something many traders neglect when creating their basket of instruments is to check for an optimal balance to avoid having your entire portfolio affected by the same event.

For example, there is a significant overlap between the performance of the DOW index and the performance of several of its major stocks. In fact, over the past decade three stocks have accounted for the strongest movement in the DJIA: Boeing, Goldman Sachs, and 3M. So, what would happen if you only traded those three stocks and the DOW, and then an unexpected event caused those stocks to perform poorly. You would immediately see your account balance take a nose dive, because you wouldn’t have any countering assets that would offset your losses.

A smart investor knows how to structure his trading activity so that he will have less exposure to sudden changes in the market. This activity is called hedging, and that is the origin of the popular phrase “hedging your bets”. While it is practically impossible to foresee the potential outcomes of every news event, the easiest way to protect yourself is to focus on assets that have shown a historical tendency to respond reliably to specific market conditions. The most common instruments that lend themselves best to hedging include Gold, JPY/USD, USD/CHF, and the S&P 500 Index.

Gold is considered a haven because if there was an economic collapse, it is a precious metal could still be used to buy goods and services and could be converted into cash easily. The yen is treated as a safe trade because the Japanese central bank works hard to promote the currency’s stability. Switzerland’s famous policy of neutrality and its importance as a global banking center has kept the Swiss Franc free from most socio-economic fads. Finally, the methodology used to calculate the S&P 500 makes it less volatile than the DOW, while still offering profit potential from the U.S. economy.

The main benefit of each of these assets is that they are either inversely correlated to the performance of the majority of the most popular trading choices, or they are less subject to wide swings in volatility. The largest volume of trading involves the Dollar, and performance of both the Dollar and several other stocks, indices, commodities and currencies is impacted based on market news from the United States. Trading at least a few instruments that usually go up if the Dollar goes down, or that don’t have a history of being linked to USD gives you some room to adjust.

Understanding the basics of a balanced CFD portfolio can help you become a better trader. In order to learn the correct techniques for choosing assets, it helps to work with a broker who offers in-depth educational resources backed up by personalized advice from a dedicated financial expert.  We recommend speaking with an Account Manager from YorkCG. For more information on opening a CFD account, make sure to visit our web page.

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