Page 148 - Ultimate Guide to Currency Trading

Diversification Is Key

Another key factor to consider when you are de-tuning your FX account is to use the proper amount of
diversification within your one-third of margin that is being used at any one time. For example, you
could build a position in your account that uses one-third of your available margin divided into three
different currency pairs.

In this example showing actual trading results, you can begin the middle of the trading week
with a zero balance in your trading account. You could then go through the "Add Funds" screens of
your currency account to add $225. This $225 is a smaller amount, but with three well-placed trades,
you can capture enough movement to make a large percentage gain, learn the ins and outs of
currency trading, and get used to closing trades by using a smart phone or iPad.

After you have added the funds to your account, they will most likely be ready to trade with.
You scan the news and discover that there has been major news coming out of Europe that has sent
the risk sentiment of the European currencies and others to the downside. Further investigation of
your daily brokerage reports informs you that not only has the risk sentiment lowered, but the world's
traders have begun to sell their stock holdings to get into bonds. This has caused a downward
pressure on the U.S. and European stock markets.

Sensing that it might be a good time to be a bottom feeder and a bargain hunter, you proceed to
divide your account into thirds. Using only one-third of your total margin, you enter in three equally
placed trades that are diversified. While the overall goal of all the trades will be to capture the
inevitable rebound in the markets, the trades will be diversified across industries.

The first pair that you enter into is a sell order for 133 units of EUR/SEK @ 9.22618. You know
that while the EUR has been underperforming against the USD during this latest bit of bad news, you
also know that the SEK is very sensitive to risk appetite and will most likely go up against the EUR
when good news comes about.

The second trade you put in is for a sell at the market of 133 units of USD/ NOK @ 5.67152.
You know that while the NOK is considered to be a very well-run currency, Norway's fortunes are tied
to the price of its main export, which is crude oil. Taking your observations further, you know that the
price of crude oil has been tied to risk sentiment lately. You know this is due to the world's traders
linking the growth of the world's economies to the demand of oil.

Many of the best trades in the Forex markets are involving currencies that are tied to
the value of commodities. These currencies are in traders' minds even more because of
the correlation of commodity consumption and growing economies. Growing
economies consume and use commodities; this in turn drives up the price of

commodity-producing countries' currencies.