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Will trading multiple pairs make my trading results inconsistent ??
Trading one or two pairs in forex will give good results ...BUT it will also give just a couple of setups pr day / week / month , all depending on the chosen strategy of course.
What do you boys and girls think....is it better to go with one or two ....or should one rather use something like 8 - 9 pairs ??
Will choosing more pairs give more random results...?
...just wandering....
Can you help answer these questions from other members on NexusFi?
Assuming you actually have an edge in each market, AND the strategy results are NOT correlated, trading multiple pairs will provide diversification. This will tend to smooth the overall equity curve, making drawdowns less severe (what are the chances of all uncorrelated strategies experiencing a bad drawdown at the same time?)
The downside to diversification is that you give up some upside to get that smoother equity curve.
If you have a great strategy, stick with 1 or 2 markets.
If you merely have an OK or good strategy (with positive expectancy), diversifying may be a better choice.
Can you actually execute your plan with effect over that many markets. If so then go for it. Maybe you need to try it to find out...also you need to be prepared for opening and running several positions at once. There will also be times when for one reason or another you decide to trade one market and not another. Sods law says the one you left rockets and the one you trade doesnt. Needs more focus and disiplin. If you can do it then you will be rewarded.
I personally prefer trading with a couple of currency pairs. I think that trading multiple pairs can distract you and doesn't let you focus on all of them. Although I guess this cannot be a problem for the most experienced traders.
You could trade two currency pairs in a hedging relationship.
For example, if I am trading EUR/USD and it runs against me, I could short AUD/USD which, if there is a positive correlation, would create profits in the hedge to limit drawdown. Furthermore, you can choose ahead of time which pair to go long and which to short by looking at the EUR/AUD chart. For example, if EUR/AUD is in an uptrend, it would be better to go long the EUR/USD with a short of AUD/USD as a hedge. You could hold both pairs overnight turning a loss into a profit.
You could also hedge pairs like USD/CAD and USD/JPY when they are positively correlated.
If you choose AUD/USD and USD/JPY as hedges, and if they are negatively correlated because USD is the base of the one pair and the quote of the other pair, then going long both would be a hedge.
You could put a pair and its hedge in the market simultaneously, let them run, take profits from the winner and trade out of the loser. Use the third chart of the two foreign currency pairs to choose the long direction.
This tends to work better with stocks, because with stocks you can find two stocks that are greater than 90% correlated. With currencies, 70% is considered high and the correlation changes and differs with timeframe. However, you can still use the correlations to diversify a portfolio.
The Internet has a summary of correlation charts for various time frames. If you experiment, use small sizes.
