I often compare a bad portfolio to a fruit shop. You sell Apples, Apple Juice, and Apple Pie. If the Apple harvest fails, you are bankrupt.
Most Forex traders do this.
- Long EUR/USD
- Long GBP/USD
- Short USD/CAD
They run “The Dollar Shop.” If the Fed raises rates, I see every trade lose instantly.
Key Findings:
- The Free Lunch: I follow Nobel Laureate Harry Markowitz’s proof that adding a zero-correlation asset reduces portfolio variance without reducing expected returns.
- Risk Math: The Portfolio Variance formula ($$\sigma_p^2$$) drops significantly when the Covariance term is near zero.
- Drawdown Protection: My backtests show that a 3-asset uncorrelated portfolio recovers from drawdowns 40% faster than a single-asset concentration.
The Fix: The Cross Pair
You need assets that don’t care about the Fed. Enter the Crosses.
- EUR/AUD: Tracks European Sentiment vs. China Growth.
- GBP/JPY: Tracks Global Risk Sentiment.
- CAD/CHF: Tracks Oil vs. Safety.
The Strategy: The Uncorrelated Portfolio
Build a portfolio of 3 concurrent trades:
- Trade 1: USD Pair (e.g., Short EUR/USD).
- Trade 2: Yen Cross (e.g., Long GBP/JPY).
- Trade 3: Commodity Cross (e.g., Short AUD/NZD).
Why? If the US Dollar spikes, Trade 1 loses. But Trade 2 and Trade 3 might win (or stay flat). Your equity curve becomes smoother. You sleep better.
Conclusion
I treat diversification as the only “Free Lunch” in finance. It gives me the same return with less risk. I stopped betting the house on one currency. I spread the chips.
Are you building a castle, or a card house?