Diversified forex trading explained - Main concepts
Diversified Forex trading, or multi-asset forex trading, is to go beyond just currency pairs and look at instruments in other asset classes like cryptos, commodities, and stocks. This approach can help to stabilize the equity curve of your trading performance because losses in one market can be balanced by profits in another. Some currency pairs are naturally linked with commodities. Pairs like USD/CAD (Canadian dollar) strongly follow oil because the country is a major oil exporter and its currency is closely correlated with oil prices. A similar situation can be observed with AUD/USD, which often tracks gold prices, as Australia is among the top gold producers in the world. Traders who understand these intricate connections can gain an edge in their trading. When oil is rising, they might look for long setups in CAD pairs or use this data as a filter to only take long positions in CAD pairs.
Balancing risks
The one distinct advantage when you trade multiple assets at the same time in Forex is to balance risks. This is crucial. You never want to get overexposed to correlated assets, or risks might get out of control very quickly. For example, trading gold, AUD/USD, and silver all long at once often leads to triple losses if risk sentiment flips and the market goes against you. Since these instruments are correlated, it is best to only pick one instrument out of these three and trade it with the best setup. True diversification means to trade uncorrelated assets, such as mixing EUR/USD major FX pairs with an S&P 500 trade or a Bitcoin trade. This technique creates more stable and less volatile performance over time and helps to survive in the long run, which is the number one priority of all financial traders.
Why trade multiple assets at the same time in Forex?
Trading multiple instruments from different asset classes at the same time has the potential to improve results by spotting and capitalizing on opportunities in several different markets. If the Forex market is quiet and presents fewer trading setups, a move in oil or BTC could still offer great profit potential. It also allows traders to hedge risks. For instance, if you are trading USD/JPY in the long direction but fear a stock market crash, you can short an equity index to reduce potential risks.
However, this technique has many disadvantages. Correlated assets magnify losses if they start to move against you, meaning it is crucial to either avoid correlated assets trading or to lower a position size and risk per trade. Overtrading is also a danger here. When there are too many open positions to manage, the effectiveness lowers as information can quickly overwhelm trade, leading to worse trading results. The best times to trade multiple assets are when markets are overall volatile, and it becomes difficult to find high-quality setups in one asset. News-driven markets where correlations are strong and trends are clear are also perfectly suitable for multi-asset traders.
Multiple asset Forex trading is also preferable to increase the number of trades. This means you can accumulate more trading results for better analysis of your strategy and approach. For example, if you have a trading strategy that produces 1-2 trades per week or even per month, it might be a good idea to add other assets like stocks, cryptos, and commodities to spot more setups. However, it is essential to conduct a thorough analysis as one strategy might work well in Forex but competently fail to perform in other assets.
Best ways to trade multiple assets
There have been multiple ways to manage multi-asset trading effectively. Manual traders often use watchlists or have tabs for several assets to watch Forex pairs, commodities, and cryptos simultaneously. They have to switch back and forth between these instruments for setups, and the most effective way is to set alerts and notifications so that you won’t miss any setup that appears. Manual traders can quickly be overwhelmed by information coming from several assets. This is especially true if you are scalping, meaning trading on lower timeframes like 1-minute charts. Algorithmic or automated trading systems can execute trades across markets based on predefined rules, and they remove emotions. Algorithms can trade unlimited amounts of instruments at the same time without an issue, and depending on the computer power, this number can be increased without issues. If you are a beginner trader, copy trading might be the best option to gain exposure to a multitude of different trading assets without heavy analysis.
Economic calendar in diversified forex trading
The economic calendar is a critical part of modern financial trading, especially for traders who want to speculate on several markets at once. Key events like Nonfarm Payrolls, Fed interest rates, or OPEC announcements can profoundly impact multiple markets and cause major volatility, which will make technical analysis not only difficult but useless as well because of many false signals. A trader should prepare for cross-asset volatility according to their plan. Without proper multi-asset Forex trading rules, winning in several different markets is impossible, just like in regular forex trading. Matching assets to their trading sessions is also an important aspect of trading with multiple assets. Forex is most liquid during the London and New York sessions, while stocks have their own strict trading hours, and crypto trades around the clock, even on weekends. When it comes to trading volatility, crypto markets are the most volatile, meaning they can cover great price distances in mere minutes. As a result, crypto trading can only be possible with smaller position sizing. Commodities like gold often see sharp price swings during U.S. data releases, and adapting trade size and timing to each market is critical for achieving consistency.