Forex Portfolio Management is a concept that is intimidating for all of the wrong reasons.
Forex Portfolio Management as a three word phrase is scary. Is it because of the word 'management'? No. Is it because of the word 'portfolio'? It is intimidating, but not scary. Is it because of the word 'Forex'? Yes, indeed.
One of the big problems in the marketplace for investors and traders is that those with smaller positions take on a lot of risk by way of volatility (cryptocurrencies) or leverage (Forex - sovereign currencies only). The way investors and traders structure their trades and investments is rather simple, just place one trade at a time. Many traders utilize their full margin balance to place every single trade. This full margin balance also happens to be a large percentage of their account.
The concepts of Forex Portfolio Management actually reduce the risk involved with trading currencies and CFDs. It also is welcoming to traders and investors who are not experienced. It's all about how the trader or investor approaches the Forex Market. Treating this market like it is the stock market with greater levels of leverage is possibly the best approach to making Forex less scary and more relatable. What does this mean?
1. Adjusting Expectations on Returns
Use the S&P 500 and Currency Mutual Funds as benchmarks for comparison. Your objective is to seek alpha, which would be returns that exceed the market returns. The S&P 500 is typically used as a proxy for the market when calculating all portfolio metrics and individual stock betas.
If your expectation is a 200% return in a month, it is simply unrealistic or far too volatile. The drawdowns will also frighten you, unless you are putting in $50 thinking that your broker is a casino.
However, setting expectations on annual returns at closer to what is typically found in the equities market helps provide a starting point.
2. Have Multiple Holdings at Different Weightings in the Portfolio
Most brokers will allow traders to create sub-accounts and this enables traders to be able to take multiple positions at once without creating any issues. Each sub-account should be viewed like a separate fund or even can be a different currency pair that is traded. It is truly up to the investor or trader.
Sub-accounts are extremely helpful for those who have built their own algorithms and tested them. The usage of backtest results can be applied to weighting for each of the sub-accounts so that the different strategies can all be implemented at once.
Otherwise, one must to trade with very low leverage and have a longer term horizon or trade with multiple terminals open at once.
3. Examining Correlations Between Currency Pairs on a Longer Range
Correlations between currency pairs are popular for statistical arbitrage and are useful for time frames of 3 Hours or greater. Anything less than 3 Hours will include a lot of trading noise.
4. Re-balancing Portfolios when it is deemed appropriate
Just like the equities market, if there is a need to create re-weightings or if a different strategy for one sub-account works best during a particular time of the year than another, it would make sense to do this.
Whatever your approach may be, you're not going into this blindly before entering your first trade.
Sound Forex Portfolio Management is designed to reduce risks while maintaining strong returns. Removing the systematic risks is critical. Having a clear expectation and understanding of what each component of your portfolio does before any live trade is entered will put any investor or trader in the Forex Market at an advantage compared to most participants. Do not just jump into the Forex Market with both feet, in fact, it is a terrible idea to just put a toe in the water before having it all planned out.
Automating the trade entry and exit process as much as possible will save a lot of heartache and a lot of time, which is important since time is such an important resource. How much is your time worth to you? Do you have opportunities to manually trade during your portfolio components' best times to execute? These are considerations investors and traders need to keep in mind. It may be valuable to learn how to code in order to perform the automated trades or a live, verified signal may be the best option.
The Forex Market is only scary because of these issues:
- Irresponsible traders.
- Irresponsible traders who have sob stories.
- Irresponsible traders with unreasonable expectations.
- The poor use of leverage by irresponsible traders.
- The promises of excessive wealth by scam artists outside of the industry.
- Traders who do not choose reputable, non-bucket shops.
The currency markets are just like any other trading marketplace and as long as traders handle it responsibly, there's nothing to be afraid of in this market.
The Portfolio Management aspect is only intimidating because of the amount of time, research and mathematical work that goes into it.
Greedy Retail Traders who happen to be lazy, want quick fixes and are afraid of math end up on the losing end. This is at the heart of why Forex Portfolio Management is scary and seems out of reach, but it is not.
Freevestor's Forex Portfolio Management services help investors and businesses with excess cash achieve alpha while also reducing risk. Every client has different needs and we can create a portfolio that meets those needs.