Diversification in Practice: My Approach to MarketsEURO / U.S. DOLLARFX_IDC:EURUSDMrRenevThe big project for me at the moment is finding ways to diversify. Ray Dalio calls diversification the holy grail of investing, and I tend to agree. If you put the numbers in a volatility formula you will find that going from 1 investment to 8 ones with 20% correlation divides volatility by 2, and going from 1 to 20 with 5% correlation divides volatility by 3. So diversification could in theory double to triple risk-adjusted returns. To help visualise what this means: Starting with 10k and making 15% a year for 10 years results in having 40k; Starting with 10k and making 45% a year for 10 years results in having 410k. Of course in practice it is not realistic to expect to find that many profit sources with such low correlation. 💰 Asset classes I am focussing on Even though I am looking to diversify, I will, at least for the time being, only focus on Forex, commodities and a little bit indices. Forex and Commodities: They have their differences, FX retraces much more than commodities, but in many ways they are similar. They are great for speculating over a few weeks, something I personally favor. Indices: I rarely trade them, but I did spend a lot of time studying them, and feel comfortable trading them the same way I trade the EUR/USD or gold. The reasons for ignoring Bonds, cryptos and shares: - Cryptos and shares behave significantly differently, - The timeframes are different, - Stocks gap so much and anyway are highly correlated to the S&P500 - I do not think it would add much to my portfolio, volatility would be the same 💰 Improvements I have made to my diversification I was able to add some instruments and reduce my exposure to the USD from 33% to 25% on average. Keep in mind that over small periods exposure can go above the average as I get so many signals. I went through a period of 1-2 months where 50% of my activity was on the USD, with intraday swings wiping out weeks of progress (it can get close to target then do a 70% retrace to entry in a few hours). I improved my diversification but it is still not enough. The Euro still amounts to 22% of my activity, and the Yen 18%, everything else is below 12% which is acceptable. I added several east asian currencies to the watchlist. I had not thought of it but Yen, Yuan and SGD pairs are actually not that expensive, liquid, and trend just like the rest. I also increased exposure to commodities I already invest in, I added gold and silver quoted in currencies other than USD, as well as Brent Oil (on top of CL1! I have been trading for years). 💰 Other instruments I might consider later on I could look at extra commodities, ag ones I don't already trade, something like Lumber, Rice or Orange Juice; as well as metals traded on the London Metal Exchange, such as Nickel, Zinc, Aluminum and Lead. I do not think there is much more I can do with Forex, there is no point trading ultra exotic pairs such as PLN/CZK where the spread is going to be huge, and who knows what could go wrong. Other than those few examples I mentionned I do not have any other ideas. If I could reduce my expose to the USD to 20% that would be great. I do not think I can push it further than this. Do you think I am wrong to ignore some asset classes? Do you know about LME metals and think they are great/terrible? Please let me know dear colleagues.