Trading in the world markets is associated with high risks. You will find this information on any broker's website. This is the reason why every trader invents a variety of strategies to reduce the risks of losing his capital. High risks in Forex are caused, firstly, by high volatility of the market (changeability of the prices). In addition, it is necessary to understand that a chance to get a big profit in a certain field in a few minutes means you need to be ready to lose everything at the same time. To prevent this, you must understand the simple truth, "You cannot put all the eggs into one basket." This phrase can be called the simplest explanation of the concept of "diversification".
What is diversification?
Diversification is a special Forex insurance, which reduces risks as your capital is divided among different assets. In brief, the more simultaneous transactions you open on different financial instruments, the less a chance to stay with nothing is. It's obvious that you don’t need to open random transactions and wait for profit. Each decision must be reasoned and supported by the technical or fundamental analysis. The diversification of risks in Forex is a strategy that is used by many experienced traders.
The investment portfolio
Next to the concept of diversification, it is always worth to tell about an investment portfolio. It can be developed, both by the trader himself and by the experienced broker manager, with whom you are working. Often, the service of the investment portfolio is provided only to traders with Vip-accounts, whose funds allow them to open transactions on several assets at the same time. The invest. portfolio includes the financial instruments on which you will be trading. It is also a kind of an algorithm for working on these tools, which is based on their technical and fundamental analysis. It is very often, that the investment portfolio includes the financial instruments with the low volatility, as the tendency of the changing of their prices is easier to trace.
It is naive to thinkб that it is very easy to develop an investment portfolio. If you do not have any experience in trading and you are just a beginning trader, entrust this business to your manager or you will have to get more experience, and only then to start its development.
Hedging is very similar to the diversification. This is also a kind of the risk reduction, where several deals are opened simultaneously. The only difference between hedging and the risk diversification is the mandatory choice of financial instruments in different markets. For example, you can open orders with two different currency pairs, three different types of shares, etc during diverrsification. When hedging, only one currency pair, one share, or one kind of metal can participate in the trading process.
All in all, you should understand the Forex insurance is a very important notion in trading. It is not enough to be able to earn money, you have to preserve your accumulated capital.