Doubling Your Risk Without Knowing It
When you are simultaneously trading multiple currency pairs in your trading account, always make sure you’re aware of your RISK EXPOSURE.
For example, on most occasions, trading AUD/USD and NZD/USD is essentially like having two identical trades open because they usually have a positive correlation.
You might believe that you’re spreading or diversifying your risk by trading in different pairs, but many pairs tend to move in the same direction.
So instead of reducing risk, you are magnifying your risk! Unknowingly, you are exposing yourself to MORE risk.
This is known as overexposure.
Going long for one currency pair and going short for another highly correlated currency pair is extremely counterproductive.
More than paying for the spread twice, you minimize your gain because one pair eats into the other pair’s profits.
And even worse, you could end up losing due to the different pip values and ever-changing volatility of currency pairs.
Because the two pairs move in opposite directions like they hate each other’s guts, one side will make money, but the other will lose money.
So you either end up with little gain because one pair eats into the other pair’s profits.
Or you could simply end up with a loss due to each pair’s different pip values and volatility ranges.