Introduction to Diversification | Reducing Risk by Portfolio Trading

Welcome to our latest content series on Portfolio Diversification.

It aims to provide a higher-level view of portfolio management ideas, rather than the specific indicators highlighted in the previous series Algo Trading for a Living.

We’ll kick things off with an Introduction to Portfolio Diversification.

Diversification is a really powerful tool for reducing the overall risk of your portfolio.

We’re going to look at the fundamental reasons diversification is an important part of any portfolio level trading strategy.

Firstly, what is “diversification” anyway?

We’ve probably all heard the saying ‘Don’t put all your eggs in one basket’; this refers to diversification.

In terms of finance, Portfolio Diversification is a term used to explain how trading portfolios can be constructed in a way that reduces the overall risk of the portfolio.

Diversification also smoothens drawdowns, in a way that is difficult to achieve by trading the components of the portfolio separately.

During this series, we’re going to look at four diversification techniques; starting in this video with a simple example using two uncorrelated FX currency pairs.

 

Which two FX pairs do you think we’re going to use?

Before watching the video, share your thoughts in the comments section below!

 

In the example, we discuss how to trade these two pairs as a mini-portfolio to help reduce the overall drawdown at the portfolio level.

Diversification is a technique that contributes to lowering the overall portfolio risk enabled by the trading of multiple; uncorrelated-techniques.

 

Do you trade any single-asset, systematic trading strategies?

Try doing some backtests on other uncorrelated assets.

Did you see any benefit from diversification? Let us know in the comments below!

 

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:
https://www.darwinex.com/legal/risk-disclaimer


Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

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