Trading non USD Forex pairs to diversify a portfolio?

[Thomas110]

Hi!

I'm considering to build a portfolio of diversified forex pairs to be traded with an EA, my account currency being USD (IC markets and Eightcap as brokers)

E.g. I'm thinking of EURUSD, GBPUSD as main pairs and AUDCAD, NZDCHF for diversification purposes as an example. Though, wouldn't this diversification be only fictive, as profits made on AUDCAD and NZDCHF would be converted to USD anyway (more specifically conversions to/from CAD and CHF would be needed at entry/exit). Hence wondering if trading these two pairs wouldn't be equivalent to trading AUDUSD and NZDUSD directly, i.e. without possible diversification as all pairs would be USD related.

Any thoughts?

[Oleksandr Medviediev]

Thomas110:

Hi!

I'm considering to build a portfolio of diversified forex pairs to be traded with an EA, my account currency being USD (IC markets and Eightcap as brokers)

E.g. I'm thinking of EURUSD, GBPUSD as main pairs and AUDCAD, NZDCHF for diversification purposes as an example. Though, wouldn't this diversification be only fictive, as profits made on AUDCAD and NZDCHF would be converted to USD anyway (more specifically conversions to/from CAD and CHF would be needed at entry/exit). Hence wondering if trading these two pairs wouldn't be equivalent to trading AUDUSD and NZDUSD directly, i.e. without possible diversification as all pairs would be USD related.

Any thoughts?

In essence, trading AUDCAD and NZDCHF is equivalent to trading AUDUSD and NZDUSD, as you rightly pointed out. The reason is that the underlying risk exposure is still against the US dollar, even though the pairs involve other currencies.

To achieve true diversification, you would need to trade currency pairs that do not involve the US dollar, such as EURJPY, GBPCHF, or AUDNZD. By trading these pairs, your portfolio would have exposure to currencies other than the US dollar, potentially mitigating the overall risk in your portfolio.

NOTE: diversification alone does not guarantee profits or protect against losses.

[Thomas110]

Oleksandr Medviediev #:

In essence, trading AUDCAD and NZDCHF is equivalent to trading AUDUSD and NZDUSD, as you rightly pointed out. The reason is that the underlying risk exposure is still against the US dollar, even though the pairs involve other currencies.

To achieve true diversification, you would need to trade currency pairs that do not involve the US dollar, such as EURJPY, GBPCHF, or AUDNZD. By trading these pairs, your portfolio would have exposure to currencies other than the US dollar, potentially mitigating the overall risk in your portfolio.

NOTE: diversification alone does not guarantee profits or protect against losses.

Thank you for your reply. Though, wouldn't trading the suggested pairs (EURJPY, GBPCHF, AUDNZD) lead to the same issue/lack of diversification, as the account currency is USD?

Hence I'm wondering:

- how transparent the underlying conversions (from/to USD) are in MT5's historical trade report

- if true diversification wouldn't be only achievable with several accounts (in USD, EUR, JPY, etc...); there would be a diversification for trading purposes, but not for holding purposes (i.e. if the cash on the non USD accounts is at some point transferred back to an USD account) - so the trading profits should be higher than the possible losses due to longer term currency price fluctuations.

Unless I've missed some aspects in CFD trading.

[Oleksandr Medviediev]

Your observations are 100% correct. The conversions to/from USD may not be fully transparent in the MT5 historical trade reports, as the platform likely shows the profit/loss in the account currency (USD) after the necessary conversions.

However, as you mentioned, even with multiple accounts, there would still be a currency risk when transferring funds between accounts or consolidating profits into a single currency account.

Ideally, the trading profits should outweigh the potential currency fluctuation losses over the long run, but this is not guaranteed neither.

[Thomas110]

Oleksandr Medviediev #:

Your observations are 100% correct. The conversions to/from USD may not be fully transparent in the MT5 historical trade reports, as the platform likely shows the profit/loss in the account currency (USD) after the necessary conversions.

However, as you mentioned, even with multiple accounts, there would still be a currency risk when transferring funds between accounts or consolidating profits into a single currency account.

Ideally, the trading profits should outweigh the potential currency fluctuation losses over the long run, but this is not guaranteed neither.

Thanks for your view

[[Deleted]]

Thomas110:

Hi!

I'm considering to build a portfolio of diversified forex pairs to be traded with an EA, my account currency being USD (IC markets and Eightcap as brokers)

E.g. I'm thinking of EURUSD, GBPUSD as main pairs and AUDCAD, NZDCHF for diversification purposes as an example. Though, wouldn't this diversification be only fictive, as profits made on AUDCAD and NZDCHF would be converted to USD anyway (more specifically conversions to/from CAD and CHF would be needed at entry/exit). Hence wondering if trading these two pairs wouldn't be equivalent to trading AUDUSD and NZDUSD directly, i.e. without possible diversification as all pairs would be USD related.

Any thoughts?

Diversification is an important part of both trading and investing.  Understanding and utilizing currency pair correlations is vital for diversification. By mixing pairs that are positively, negatively, and neutrally correlated, traders can manage risk more effectively. At the end everything is collerated with USD directly or indirectly.

[Rafael Grecco]

Choosing pairs to diversify is not as simple as choosing different base currency, because correlations varies depending on several factors:

- If you are trading on low timeframes, correlations can vary greatly based on the time of the day.
- If you are trading higher timeframes (H1, H4, D1), correlations can vary based on political/economical/seasonal influences.

If you write you own EAs you could code it to calculate on real time the correlation between pairs.

I run my EAs on 20+ pairs, but before any trade is opened, my EAs will use Pearson Formula to check the correlation with already running trades. This is the formula:

https://en.wikipedia.org/wiki/Pearson_correlation_coefficient

If you run EAs on higher timeframes you have to option to once a day/week check a correlation table and manually choose wich pairs to keep your EAs running.