DAY 20: Management of Multiple Positions – Portfolio Thinking

On DAY 19, we learned the importance of understanding the characteristics of each currency pair.

There, many may wonder, “When holding multiple currency pairs at the same time, how should we manage risk?”This question might arise for many of you.

Today's theme is,the way of thinking when holding multiple positions simultaneously, in other words“portfolio thinking”**.

Diversification is a key word in investing, but in FX there are special points such as correlations, which makes it not so simple.

Let's organize the advantages and disadvantages of multiple positions and think about appropriate risk control.

1. Why is multi-position management necessary?

1. Risk diversification

   • If you concentrate funds in a single currency pair, a move against that pair can cause larger losses.
   • By combining multiple currency pairs, you can expect “loss reduction” from the variation in the directions currency moves.
     
     

2. Broadening opportunities

   • By monitoring multiple pairs, you are less likely to miss revenue opportunities.
     
     

3. Stable income

   • By combining volatile pairs with more stable ones,aim for overall sustainable growth.
   • For traders who prefer stability over short-term big gains, this is a viable option.
     
     

2. Understanding correlations is essential

(1) Are the positions going in the same direction?

• For example, “buy USD/JPY” and “buy EUR/JPY.”
  • Since both positions involve selling the yen, when the yen strengthens, both suffer damage.
• “Buy EUR/USD” and “buy GBP/USD” are also both dollar-selling, so if the dollar rises sharply, both go against you.
  
  

(2) Risk of stacking currency pairs with high positive correlation

• The stronger the positive correlation between currency pairs,the more similar their movementstend to be.
  • Example: EUR/USD and GBP/USD, or AUD/USD and NZD/USD.
• Entering long on both can greatly widen profits if directions align, but losses can also double if they move against you.
  
  

(3) Hedging concept with negative correlation

• Pairing assets that tend to move in opposite directions can, to some extent, offset losses.
  • Example: USD/JPY and gold (not strictly negatively correlated, but tend to move in opposite directions to some extent).
• You cannot eliminate risk completely, but you can achieve some hedging effect.
  
  

3. Number of simultaneous positions and capital management

(1) How to set risk per position?

• If you risk 2% of account funds on one position, with multiple positions you must ensure total risk does not exceed 2%.
  • Example: If you hold 2 positions, make each 1%.
    
    

(2) Be careful with the number of positions including the same currency

• Example: Buy USD/JPY, sell EUR/USD, buy GBP/USD, etc. Simultaneous positions may increase reliance on the dollar.
  • Check the total risk of these positions and simulate the impact if the dollar moves unexpectedly.
    
    

(3) How to adjust lots

• For currency pairs with high volatility, reduce the lot size to limit risk.
• For more stable pairs, allocate somewhat larger lots, soadjusting per currency pairhelps balance risk.
  
  

4. Pros and cons of increasing the number of positions

Advantages

1. Opportunity expansion
   • Possibility to profit from multiple trending pairs.
2. Diversification reduces risk
   • Easier to offset losses from one pair with gains from others.
3. Continued opportunities after stop-loss
   • If one pair hits a stop loss, other pairs that are still favorable can keep total profit positive.
     
     

Disadvantages

1. Management becomes complex
   • It takes effort to monitor and analyze multiple currency pairs simultaneously.
   • It is easy to confuse stop-loss and take-profit levels.
2. Unforeseen large losses due to correlation risk
   • If you stack positions in the same direction by mistake, losses can magnify when the market moves against you.
3. Increased mental burden
   • Holding 5–10+ positions can be hard to manage; with 2–3 positions at first, progression is recommended.
     
     

5. Example: portfolio-like thinking

(1) Example 1: diversified holdings of major currencies

• Aim：Combine currencies from different economies such as the dollar, euro, pound, and Australian dollar.
  • Examples: USD/JPY, EUR/USD, AUD/JPY
• Advantages：If one is hit by an unforeseen event, others may cover it.
• Caution：Many cross-yen pairs increase dependence on the yen, ultimately exposing you to strong yen depreciation or appreciation.
  
  

(2) Example 2: hybrid of high volatility + stable pairs

• Aim：Operate high-risk high-return currencies (e.g., GBP/JPY) alongside relatively stable currencies (e.g., USD/JPY).
  • Example: small lot GBP/JPY + moderate USD/JPY.
• Advantages：Can aim for large price moves while supplementing with stable income from stable pairs.
• Caution：GBR/JPY and USD/JPY both involve yen; trends in yen strength or weakness can amplify risk.
  
  

(3) Example 3: multi-currency operation with EA (automatic trading)

• Aim：Run multiple EAs, diversify currency pairs and strategies.
• Advantages：Fully automated, can run multiple strategies in parallel beyond manual capacity.
• Caution：Correlation and risk-management parameters tend to be complex; one EA running amok can cause big losses that others may not cover.
  
  

6. Summary & next forecast

Summary

1. The main purpose of holding multiple positions is “risk diversification” and “expanded opportunities”
   • However, simply increasing positions without considering correlations can actually raise risk.
     
     
2. Understanding correlations
   • If you hold positively correlated pairs in the same direction, you need to adjust lots or reduce total risk.
   • When held in opposite directions, hedging can help, but profit potential may shrink.
     
     
3. Combine with money management
   • Even if you limit risk per position to 2%, holding 3 positions yields 6% risk, so beware.
   • Consider the volatility of each currency pair and adjust lots accordingly.
     
     
4. Anticipate the management effort and mental burden
   • Holding too many positions can cause confusion. Start with a combination of 2–3 currency pairs.
     
     

Next time (DAY 21) theme: Strategy construction summary & Q&A

• We will review DAY 15–20's “market environment recognition,” “entry/exit strategy,” and “multi-position management,”and how you can build your own trading strategy.
  
  
• We will also address questions and provide tips for stepping up, so stay tuned!

If you’re interested in automated trading, please also check the link below.
https://www.gogojungle.co.jp/users/147322/products

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Thank you.