Foreign exchange offers manifold prospects to invest and earn a substantial amount of profits, but this advantageous option is only one side of the coin, the other being the potential of loss. Forex and CFD portfolios are helpful instruments to tackle the challenges of trading. A diverse portfolio includes investments in multiple currency pairs and other financial tools.
The following article provides information and guides on building an exceptional portfolio using forex and CFD trading strategies and instruments, such as FXGiants and the MT4 trading platform.
Forex and CFD Trading: A Brief Overview
The foreign exchange or forex market is a global market for exchanging international currency pairs to make profits. Valued at 805 billion USD as of 2023, the forex market is the most liquid and active in the world, with people from retailers, institutions, and commercial and investment banks all over the globe participating every day. However, due to forex being ubiquitous, it can be impacted by geopolitical events, inflation, and interest rates.
CFD Trading
CFD or Contracts For Difference is a contract between an investor and the bank, who, at the end of the trade exchange, the difference between the values of the opening and closing of the trade. Trading CFD infers that making a profit or loss depends on the choice made by the trader, predicting in which direction the asset moves. CFD Trading lets a trader speculate whether the price would rise or fall and decide whether to sell or buy.
Since Forex and CFD trading provide significant opportunities for traders to earn profits while having their downsides, portfolio diversification is essential for traders.
Portfolio Diversification: Need of the Hour
Portfolio diversification refers to investing in multiple assets so that the overall return doesn’t entirely depend on a single investment. Portfolio managers highly recommend developing a portfolio with a well distributed equilibria for successful trading.
A good quality portfolio is said to contain about 20 to 30 asset investments across various investments. It may include assets like:
- Bonds
- Savings accounts
- Real estate
Every asset behaves differently in the market. Diversification is essential as it helps stabilize the results since investments like savings accounts and real estate appreciate slower, while stocks often exhibit sharp rises and fall; in case of a loss, a diversified portfolio may soften the blow and reduce the damage caused.
It must be noted that even though diversification reduces asset risk, it cannot reduce market risk—the risk of owning any type of asset.
Build a Portfolio With Forex and CFD: A step-by-step guide
Demarcate Risk Tolerance
Risk tolerance is the amount of risk that you’re willing to take. Each trader’s risk tolerance is unique. It may also be impacted by financial goals, mental efficiency, and response to the sporadic market and their respective investment goals.
Novice traders with broader ambition and investment horizons are more inclined towards high-volatility markets, while more experienced traders tend to trade in for a less volatile market.
Using a reliable trading platform
Choosing the right platform plays a vital role in successful trading. Platforms like FXGiants are very popular for forex and CFD trading.
With their advanced tools, technical assistance, and user-friendly tools like the MT4 trading platform, traders can monitor their investments, avoid margin calls, access educational content and news regarding forex, and access various types of assets.
Choose a Time frame
The chosen time frame can significantly impact the portfolio. Forex traders can use multiple time frames like:
- Medium-term trades are held from a few hours to days
- Short-term time-frames are held only for a few minutes, like a 1 or 5-minute time frame.
- Long-term time frames may last for weeks or even months.
Usually, the time frame chosen by a trader depends solely on their attention and personality; for some people, a 10-minute time frame trade may be too long before they can enter a trend, while some people might only prefer weekly or monthly trades.
For instance, choosing short-term trades in more volatile markets and holding long-term positions in major currency pairs can help a trader balance risk and reward.
Mix Currency Pairs
A major key to diversification is mixing currencies of different kinds, whether exotic, major, or minor. Major currency pairs such as EUR/USD and USD/JPY are the most popular among new traders. These pairs are the most widely traded, offer high liquidity, and are thus less volatile, reducing risks significantly.
Minor currency pairs, or cross-currency pairs, do not include the US dollar. Some examples of minor currency pairs are:
- EUR/GBP
- AUD/JPY
- and GBP/JPY
Minor currency pairs are highly volatile due to the less liquidity and lower trading volumes associated with them.
Various factors may have a significant impact on the currency pairs:
- Interest rates
- GDP Or Gross Domestic Product
- Geopolitical instabilities
- Level of foreign investment in a country’s domestic market
Conclusion
Building a diversified portfolio with forex and CFD trading is imperative if a trader wants to ensure effective risk management. An impactful way for traders to diversify their portfolio is to distribute it across various assets, time frame based trading and mixing different kinds of currency pairs to reduce possible losses.
Some other ways to ensure your portfolio is of top-notch quality are:
- Ensuring the portfolio is not over-diversified by balancing all asset investments
- Staying updated with the news of the financial market and trends
Practicing these strategies religiously mentioned in the article on platforms like FXGiants using a demo account can help understand the market thoroughly, develop a command over marketing strategies and grow as a trader.
The user-friendly interface of the MT4 Trading platform can help traders stay ahead of the curve in terms of trends and feasible investments and avoid losses.
DISCLAIMER: This information is not considered investment advice or an investment recommendation, but is instead a marketing communication
