How to build a diversified Forex portfolio

Thinking of trying your hand at foreign exchange trading? Discover how to get started, and the importance of building a diversified portfolio to achieve success and safeguard against losses.

What is Forex trading?

Forex trading is the buying and selling of currencies to profit from fluctuations in exchange rates. London is the biggest global foreign exchange hub, closely followed by New York, Singapore and other major financial centres. Trading can take place anywhere in the world, but understanding the impact of different trading sessions (e.g., London, New York, Tokyo) on market volatility can help traders make informed decisions.

Market participants range from retail traders and financial institutions to central banks. Traders typically deal in currency pairs, with the most common pairs including major currencies like the US Dollar (USD), Euro (EUR), and British Pound (GBP). Key concepts to grasp include:

• Pips – the smallest price move in a currency pair
• Leverage – using borrowed funds to increase trading potential
• Spreads – the difference between the buying and selling price

The Forex market operates 24 hours a day across different time zones, reflecting its decentralised nature and unchallenged status as the most liquid financial market.

Diversification strategies

Why Diversify?

Concentrating fully on one or two currency pairs leaves you vulnerable to significant losses because the Forex market is notoriously volatile and can be hard to predict. Diversification – putting funds into several currencies – reduces this risk as the impact of poor performance of any single asset is diluted.

Select a mix of major, minor, and exotic currency pairs. Major pairs, such as EUR/USD and GBP/USD, offer high liquidity and narrower spreads. Minor pairs are less-traded currencies, while exotic pairs include currencies from emerging markets. Understanding correlations between pairs helps in creating a balanced portfolio – although remember these are changeable.

Stay informed about global news and economic data releases as these can significantly impact currency movement, from elections to wars. These events can instantly affect exchange rates with no warning.

Managing your portfolio

Selecting a reputable broker to trade through is vital. Look for Forex brokers regulated by the Financial Conduct Authority as these companies will be compliant with legal guidelines and bound to protect your interests. Choose between traditional person-to-person trading or using online platforms from companies such as Tradu to manage your investments directly.

Before diving into live trading, use a demo account to practice without financial risk. Familiarise yourself with basic trading strategies, such as:

• Trend following – trading in the direction of the current trend
• Range trading – buying at support and selling at resistance
• Breakout trading – trading based on significant price movements

Effective risk management is crucial, even once you’re established. Track the performance of your assets and regularly adjust your portfolio based on market conditions. Use stop-loss orders to limit potential losses and take-profit orders to secure profits at predetermined levels. Position sizing ensures you do not risk too much capital on a single trade. Maintaining discipline and setting realistic trading goals is also key to successfully designing your portfolio.