You long Pounds/USD and you long Euro/USD as well. So, they are going to be pretty similar, right, the way they move?

Yeah. So, if let’s say something bad happens, then both of them might hit your stop loss at the same time. So, effectively you’re actually taking on more risk on the co-related instruments, you’re not actually diversifying the risk that you have in separate, generally more unrelated or co-related instruments. Okay?

So, that’s the thing about currency is that you can, a lot of times the currency pairs that you trade tends to be somehow having some significant co-relationship. You can’t avoid that because they are all interlinked with one another, right?

It’s like you are saying, I trade, let’s say, a bank stock in US versus I trade a mining stock in Australia. Then they are going to be very not co-related, all right, Because they are different geographical country, different industry, different business model. So, how this move is not going to affect this and how this move is not going to affect that.

So, you will not encounter losing streak so frequently in that manner. So, that is the thing I like about stocks trading, is that it’s much more easier to diversify and reduce the co-relationship between the trades that I take versus trading currency.

If you look at all the major trading currencies, they are all majorly packed to USD, right. So, if something drastically happened to the United States, that is going to affect the currency in the same similar direction or opposite direction. So, it’s very highly correlated, very difficult to diversify.

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Philip Teo

Founder & CEO at Traderwave Pte Ltd
Philip Teo is an entrepreneur, speaker and trading coach who specialises in the field of Technical Analysis of the financial markets. He is currently the Founder and CEO of Traderwave Pte Ltd, a financial technology company that offers a web charting application to global traders. He has conducted many trading seminars and appeared on national television before. He is also currently an official speaker and trainer with SGX Academy. Learn more about him at his Google+ Profile, LinkedIn Profile and Facebook Profile

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