🛡️ Risk & Money·intermediate

Diversification

Spreading risk across multiple uncorrelated trades, assets, or strategies — to avoid having all your eggs in one basket.

Diversification is the practice of spreading risk across positions or strategies that DON'T move together. The goal is to reduce overall portfolio volatility without sacrificing return — when one position is losing, another is winning, and the swings cancel out. Real diversification requires LOW correlation between positions. Holding 5 different forex pairs that all share USD as a common factor isn't diversification — it's concentration in disguise. True forex diversification combines forex with assets that have different drivers: gold (safe haven), oil (commodities), indices (risk sentiment), bonds (rates). Diversification is a mathematical tool, not a strategy. It works best when each component has positive expectancy on its own. Diversifying across losing strategies just spreads the loss.

Real trade example

Ray Dalio's All Weather portfolio uses radical diversification across stocks, bonds, gold, commodities, and TIPS — designed to perform in any economic regime. Its drawdowns are dramatically lower than the S&P 500.

Related terms

Correlation

intermediate

A measure of how two markets move in relation to each other — values range from -1 (perfect opposite) to +1 (perfect same).

Hedging

intermediate

Opening an offsetting position to reduce risk on an existing trade — sacrificing some upside to limit downside.

Risk Per Trade

beginner

The amount of money or percentage of account equity you put at risk on a single trade — usually 1-2% for serious traders.

Carry Trade

advanced

A trade where you borrow a low-interest currency to buy a high-interest currency, profiting from the rate differential.

Risk-Reward Ratio

beginner

The ratio between how much you risk on a trade and how much you stand to make — the math that makes trading profitable.

Position Sizing

beginner

The math that tells you how many lots to trade based on your account, stop distance, and risk tolerance.

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