Page 123 - Ultimate Guide to Currency Trading

Concentrated Positions

There are several methods to getting more out of your trading account. Once you decide that you
would like to amp up the risk-return ratio of your FX portfolio, you can use these methods to get
maximum results from your account. Most currency traders will have four, five, or even six different
cur-rency pair positions on their books at any one time. When you follow this practice and have many
different positions open (both long and short), you can hedge away some of the risk in your currency
account.

This hedging comes from using different pairs to create positions that are both risky and risk
adverse in nature. You can go long commodity currencies, long the currencies that do well when the
U.S. stock market does well, and go long the safe-haven currencies.

Widely diversified currency trades have the effect of alleviating the problem of
guessing what direction the markets will move in the next trading session. Make sure

that you have three to five currency pairs on your books if you are unsure of the
Essential
direction of the next few days' risk sentiment.

With many trades on the books, you can capture the gains on up, down, or sideways market
movements. The overall effect is a bit of loss, and a bit of gain. With this you will gain, but by smaller
amounts.

If you are setting up your trading system to be a high performance account, you need to go
against the diversification strategy. The strategy that works best for getting the most out of your
accounts is one of concentrated positions. Instead of five different currency pairs, you would get into
two or three currency pairs.

Additionally, you would have these three currency pairs be the same direction. If the three
pairs are the same direction, they are not hedged, and all will move in the same direction according to
the risk sentiment of the markets. For example, if you have two positions and both are risk trades,
they will both win or lose as the markets accept or reject added risk to their portfolios.

If you have two long commodity-currency trades on the books, even though they are different
countries' currencies, or even from different parts of the world, they will move up when the traders of
the world are feeling good about the economy. If you have an AUD/USD and a USD/ NOK on the books,
they will both move in the same direction when there are reports that the world economies are
chugging ahead and everything is going fine.

Concentrated positions in the same direction will give your account an added return when the
currency market and the stock markets move in your favor. Even if you have risk-averse trades on the
books, if you are long the USD, the JPY, and the Swiss francs, you are still concentrating your positions
in directional trades. All of these currencies will move up when the economy is feeling sick. If the