All In or Spread the Risk – Mastering a Portfolio Play

Some traders often like to focus all of their hope into one setup at a time. This can inspire additional pressure on these single layer setups to play out in their favour more than that of a trade that incorporates multiple trades. 

Mean Reversion

When two markets are correlated and one of them suddenly shifts away from their correlation leaving the other behind, it creates the possibility for traders to buy one and sell the other. This setup over two pairs or two markets is called a mean reversion. The idea is that the two markets will eventually fold back into their mean correlation leaving a positive net movement for the trader overall. 

While one may lose money, a mean reversion trade expects that one of the positions should make more than the losing position.

Portfolio 

Using alternating correlated pairs can also help to reduce risk, trading multiple currency pairs or markets based on a solid strategy could help to develop a portfolio play that reduces pressure on single layer trades (one trade at a time), possibly also reducing the risk across the portfolio.

Risk

Multiple trades could of course increase risk, if the total exposure across all trades was not considered. Considering the total number of trades and risk you intend to place would be critical before getting into multiple positions so as not to hold too much risk at any one time across the portfolio. 

This can make it a little trickier to plan when compared with holding a single trade at a time, since the trader needs to consider future trade volume (lot sizing), size of the stop loss and risk overall.