Ever heard of the famous idiom “Don’t put all your eggs in one basket” This expression comes from a proverb likely to be Spanish or Italian. The truth in this proverb is very much undisputed in that it has proven its sense time over and over to date. It alludes that, if you gather all the eggs from your hens into one basket, there is a chance that you could drop the basket and break all the eggs, and if the eggs were in the chicken’s nest, a snake could slither its way into the nest and eat away all the chicks when hatched and finally, in case of any unforeseen circumstance the eggs might also not hatch into chicks. Sad.
The real meaning of this idiomatic expression is that one should not concentrate all efforts and resources in one area as one is at risk of losing everything. True to the words of this expression, it cuts across various aspects in life such as when an Orange fruit juice company releases a new line of Pineapple juice and mango juice or how Mercedes Benz produces the AMG Series of cars to sell along with the A,B,C and S Class Sedans. So does diversification apply in Investment and trading the forex markets.
Risk diversification therefore in trading is the concept of allocating funds or trading account to different asset classes and financial instruments in order to spread risk and preserve capital. Financial analysts and Asset managers who manage their client’s portfolios clearly understand this concept and on their side, when they diversify their risks, they call that Downside protection. You are equally as a Forex trader need to understand how you can diversify your risk while trading the Forex market.
Here Are 3 Reasons Why You Should Be Diversifying Your Risk as a Trader
Minimizing the risk of loss
As a trader investing your hard-earned money in the Forex market, you need to be aware that there is risk associated with trading. You however need to understand that diversification is a way to minimize the risk of your losses. When certain investments or asset classes perform poorly in the short or long term, other trades that you could be invested in could perform better over the same period. Therefore reducing the potential losses of your trading account by diversifying your account will help you continue trading over a longer period while being profitable.
Risk diversification is important as it helps you to preserve your capital in your trading account. This increases the confidence level of a trader in knowing how to navigate the financial markets without being affected by the uncertain occurrences of events while still trading and being profitable. In the case of asset and fund managers, capital preservation is important to them to avoid loss of the assets entrusted to them by their clients in order to keep generating returns for them.
It is the rule of thumb that for one to keep on generating returns on investment, there has to be capital. As a trader when you have the capital in your trading account, you can keep on generating income and making good returns on your investment. This means that when you diversify your asset classes while trading when certain assets do not perform, you are still able to continue generating returns on other assets.
Risk diversification in Forex trading means investing across different asset classes such EUR/USD Currency pair, Gold (XAUUSD), Crude Oil, Shares e.g Tesla (TSL) and Apple (AAPL). Therefore certain trades/investments will perform better than others over time depending on factors such as; current market conditions, interest rates and currency markets. Diversify your investments in order to continue trading for a long period while being profitable. “Do not keep all your eggs in one basket” the wise ones say.