Diversification in the market

Diversification - (from Latin diversus - different + facere - to do) - a change in the range of products and reorientation of markets. Diversification in the realm of investments implies a variety of investment assets so that potential losses on one instrument are offset by another. As a rule, diversified portfolio The risky assets with high returns and high risks and the risk-free or low-risk assets are divided into two parts.

By ignorance, people often confuse diversification with the so-called naive diversification (naive diversification) - The method of forming a portfolio, which includes a variety of instruments with different risks without any connection with risks and returns. Beginner investors think that simply "scattering" capital in various assets will insure themselves against risks, but if all or most of the assets are risky, this approach makes absolutely no sense.

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Is it possible to diversify your "portfolio" in the market?

Undoubtedly. There are a sufficient number of different currency pairs on the currency market, each of which has its own volatility. For example, the favorite currency pair USDCHF is generally regarded as a safe haven, and GBPJPY, for example, is a rutting stallion, galloping large distances in pips, which indicates both high potential profits and losses. Thus, by "putting eggs in two different baskets" - by dividing capital for trading between these two pairs one can quite easily reduce risks, if a trader prefers aggressive trading.

Technically, diversified portfolio must consist of uncorrelated assets, i.e., assets that are not related in any way (in practice, minimally related). Therefore, it is quite difficult to diversify one's assets in a single market. As for semantics, it would be more correct to talk about hedging risks on market rather than diversification.

DiversificationAs any other money management method has a significant disadvantage - the potential income decreases with the reduction of risks. That is why people often speak negatively about diversification, believing that it is necessary to deal with one sphere - if you win, you will win much and at once, and if you lose... That is where the idea ends.

In practice, smart diversification It implies investing in the real economy (trade in goods, services) and financial instruments, be it securities, deposits or trading on the foreign exchange market. Not in vain, more and more often one hears the advice to invest as much as one can afford to lose. It is psychologically difficult to incur huge losses, realizing that this is the main asset and without it life will become slavery, so it is highly recommended to cover your rear, having a permanent source of income outside the currency market.

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