Thomas Brian A_ Jenkins

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What is portfolio diversification in forex and why is it essential?

Diversification means spreading risk across multiple instruments, strategies, and timeframes. In forex, traders often mistakenly think trading EUR/USD and GBP/USD is diversification, but both pairs are highly correlated. True diversification may involve combining major pairs with commodities (gold, oil), indices, or even crypto. Benefits: reduced volatility, smaller drawdowns, and greater resilience to black swans. Institutions diversify systematically, allocating across geographies and asset classes. Retail traders can diversify by mixing trend and mean-reversion systems, or by trading uncorrelated pairs like USD/JPY and AUD/NZD. Risks: over-diversification dilutes returns and increases complexity. The key is thoughtful diversification—choosing exposures that balance risk without overlapping. In forex, diversification isn’t about quantity of trades; it’s about quality of independence.