eToro – Forex Trading Forum

[partridge18]

Hey all!

I want to share my thoughts on risk diversifications, since I have recently started to use this technique together with my trading system, and it has proven to be very successful in minimizing the risk I take on any single trade. Obviously, the profits are smaller in the short term, but because the losses are much smaller as well, over the long term the profits are much greater and much safer.

So the gist of it is, that you should never open only one position on a certain instrument. You should always open at least one other position in the opposite direction.

This of course doesn't mean that you shouldn't open a long and short position on the same currency pair. That would only mean that you're paying spreads for nothing.

Here's an example of what you should do. If for instance you see the EUR/USD trending up, and you want to open a long position on this pair, you should also consider openning a short position on GBP/USD for example, or EUR/GBP, to make sure that you're covered in case of a reversal.

You should probably make these hedging positions somewhat smaller than your primary positions, because after all your trading system is supposedly right, and you do want to make a profit. And remember to never have more than 6% of your capital invested at once, as any money management expert would tell you.

So far, it's been working great for me, but I'd love to get feedback or any other suggestions/ improvements on this system.

Cheers!

[digitaltrader]

Thanks for the tip. I haven't started trading yet, just scared of it still. I had bad experience with Forex probably because i was a newbie. Your tip will certainly help.

[BlueinGreen]

Hey partridge,
I think you got it right- trying to minimize and mainly control risk is essential for success in trading. However I would like to point out a few things that may be of help to you in your trading.

First notice that if you are longing EURUSD and shorting GBPUSD at the same amount of dollars than you are actually longing EURGBP.

And just for example: you short 1000 dollars and get the equivalent in euros (long EURUSD) while you are longing 1000 dollars and sell the equivalent in pounds (short GBPUSD) than you are actually long $1000 and short $1000 at the same time. You are fully hedged against dollar movements and only vulnerable to EUR moves against GBP hence you are long EURGBP.

I know that you are covering only a bit of your position with the hedge trade- but you can still save some spreads by using EURGBP.


I also use the technique you suggested many times, but in a different way. I used to buy EURUSD and USDCHF proportionately to Dollar amounts if I wanted to long EURCHF and it was not available with the broker I was using.( these pairs correlate more than 90% negatively )The EURCHF trade was what we call a
“synthetic pair”
Trading it by longing and shorting EURUSD and USDCHF

[giuseppe199970]

lki

[annet1983]

is it risky to have many , like 2 or 3 positions opened?