Trading Divergence in forex trading

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Get acquainted with diversified techniques in forex trading

Get acquainted with diversified techniques in forex trading – Forex trading today has become a new trend to earn revenue. Many people are successful in this business. But you need to know if being successful is not an easy thing. You need a short time, to make a profit. If you want to do forex trading business, of course you have to learn about various techniques in forex trading. One that you can learn is the diversification technique that we will discuss below:

Overview of Diversification Techniques In Forex Trading

Diversification is a technique that aims to reduce the risk of loss in some areas.In forex alone, the purpose of diversification is to prevent the loss of all your capital. Especially when it is, a state of crisis and extreme value depreciation.This diversification technique in general, better known in stock trading. This is because strategy, it is ideal with stock assets divided into various sectors. Where each of these stock sectors, have fundamental fundamentals that are different from each other.

However in forex trading, divergence techniques can also be done. Although if we use it will be more optional. The cause is because the factors that affect the movement of the pair is not too complex. In addition, the pair in forex are still related to each other. For example, which can be an example such as major pairs.The USD membership can be analyzed by diversification technique. With the same fundamentals, the economic growth and the policy of the US central bank.Diversification in forex has such linkage, so it must be based on the science of pair.

Correlation between pair

Correlation pair-pair in forex there are two that is negative and positive. Pair with positive correlation usually has the same base or quote currency. such as EUR / USD, EUR / GBP, EUR / JPD, etc /. While the pair that has a negative correlation linked by one currency whose position is not the same. eg for example EUR / USD is relatively negative correlated with USD / JPY. Although both are both major pairs and are pegged to USD, but the currency is in a different position. That mean from different here is the one as the quote currency in EUR / USD and the only base currency USD / JPY.

How to distinguish positive and negative correlations themselves is quite simple. If you buy EUR / USD it means you buy Euro and sell USD. If you buy with EUR / GBP, you also will buy Euro. The bottom line of both buy purchases is to see the potential increase in the currency. But on the other hand, if you buy USD / JPY, that means you buy USD and sell JPY. Well if you do of course such transactions conflict with buy EUR / USD is done by selling USD. One thing you should note is that the nature of the correlation between forex pairs is not static.

The use of pair correlation in divergence techniques

As we discussed earlier the essence of the use of diversification in forex is limiting risk. That mean in every trading of course you have limit losses, then you can just use a correlation understanding for the purpose. For example in every trading you have a minimum risk limit of 5% and equity worth $ 50. This means you can use $ 25, to open 1 sell position and 1 buy position, in two pairs that are positively correlated. You can also divide it by the $ 25, to open 2 buy positions in 2 negative pair.

Examples are as follows:

  • 1 buy position for EUR / USD and 1 sell position for EUR / GBP, or it could be
  • 2 buy positions for EUR / USD and USD / JPY

In forex trading, diversification can be considered to have a higher risk. This is because you have to open more than 1 position. It mean if you have 2 trading positions, you will be subject to spread and margin 2 times. For that as much as possible try to accumulate the position of diversification. That way you will not exceed the minimum risk per trade. In addition, make sure you also calculate the extra risk of margin and trading costs such as commissions or spreads.

 

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