Why is diversification so important? Investment example with FinmaxFX broker

Adyen Noters

There are so many diversification examples around us even in usual daily life, we just can’t see them. Have you ever tried to eat the same food three times a day, seven days a week? That would be the best experience, would it? Why people always change dishes, menus, cuisines? Their bodies need to diversify the products they get. Why large car producers or any other manufacturers prefer to have different supplier for their parts? They need to broaden risks. What would happen if one supplier stopped sending parts to the manufacturer? The production will stop, sales will halt, salaries won’t be paid, investments would not be returned, etc. The same way financial managers and institutions distribute losses. Yes, losses. Investing and trading in the financial markets is not about dealing with profits. It’s about how you manage your risks. What is the crucial operational factor for a trader? Right, that’s a likelihood, a chance. Traders deal with probabilities of how far and how fast and where could go this particular financial instrument. That is why they manage risks in their trading decisions for any specific asset. But what if you had a certain number of assets in your investment portfolio?

Diversification is an investment approach aimed to minimise risks related to the trading process. This approach suggests spreading or distributing financial risks or manufacturing resources to different sectors and fields. This strategy became widely used in the foreign exchange market as it helps lowering losses in trading.


The importance of diversification for traders


Diversification types

The main idea is to allocate trading capital to different asset classes which are not related to each other. There are several directions of that distribution in forex trading:


● Platforms diversification. Traders can open many accounts with different brokerage companies and trade with all of them at the same time. If one company was blown up, or the trading conditions were not so attractive for a trader, then a couple of other accounts with other brokers would remain in reserve.

● Investment types diversification. It is possible not only to trade in the FX market but also benefit on binary options type of trading or speculate on company shares in stock exchange. If the FX market was not providing the best conditions to profit, traders would always benefit on binary contracts even during a sideways consolidation range.

● Asset diversification. Traders should not rely on getting profits from currency pairs only. FinmaxFX has more than 400 instruments for trading on. Traders can trade on different asset classes or invest in various investment projects in order to play it safe, avoiding the subsidence of the account balance.

● Trading strategies diversification. Several trading systems might be used at the same time. Those algorithms might not only focus on trading on different assets but also on different timeframes, while the financial instrument would remain the same. For instance, the same asset might show a buying opportunity on the one-hour timeframe, while the 4-hourly chart would signal to sell it. FinmaxFX trading terminal remarkably has 21 timeframes to spread risks in this way.

Below is a list of recommendations on how to trade in the forex market using diversification

● The investment portfolio should contain uncorrelated assets, i.e. financial instruments which have minimum relation to each other. That conditions allow getting profits from trading on one asset while the analysis of the other points to a tough period to make a deal. For example, traders can open positions on the USD/CHF currency pair, which is usually considered as a quiet harbour, and on GBP/JPY jumping for higher distance measured in pips.

● Avoid investing large amounts into the trading account initially. Traders can start with something small and grow the trading account step-by-step. For example, a moderate amount of $100 is enough to begin trading with FinmaxFX broker. Of course, a more substantial amount is needed to get access to all of the company’s offers and benefits. However, $100 is enough to start making money. Risks diversifications suggest opening two small accounts with two brokers but not one large account with one broker.

● Brokers often offer bonuses for first-time deposits. Traders and investors should carefully consider all of the broker’s bonus conditions before accepting the offer as some of them aren’t achievable for everyone. Bonus offers might be accepted just in case if a trader is entirely self-confident.

● Part of the profit has to be regularly withdrawn to avoid the risk of losing the account balance due to technical or economic reasons. Traders should determine an optimal amount to get access to all of the trading instruments and broker’s services, while the rest of the funds should be transferred to another account or withdrawn. FinmaxFX allows withdrawing funds to credit and debit cards, wire transfers or e-wallets, while the average time of withdrawal takes one day and some accounts could do that in 5 hours.

In general, the diversification of investment risks helpt protecting the capital from losing it, compensates losses when trading on correlated assets and provides reasonable terms of getting profits. Like any other money management method, diversification has disadvantages, the main of which is that decreasing risks suggests lowering potential gains. Investors should not rush for super profits, trade too aggressively or irrationally in the forex market as that would lead to the overall crash of the trading account at the end of the day. It would be much better to develop your own strategy, according to your style, and compose a portfolio of several high-yield assets.

If you face difficulties in creating your own investment portfolio, you might choose an existing solution developed by powerful FinmaxFX team consisting of experienced traders. They made a comprehensive fundamental and technical analysis. As a result, they designed 3 investment portfolios with an average return exceeding 130%. All you need is just to sign up on FinmaxFX website and get a consultation about the investment conditions with the broker to make sure that this result is achievable.


“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”