Forex trading is a lot of fun…when trades are going your way. But when you are on a losing streak, it can seem like forever since you saw your last profitable trade.
It can be a grind that seems like it will never end. You are only one person. You can only make so many trades a week.
If you are tired, you cannot expect to trade well.
If that is your only source of income, all your eggs are in the preverbal basket…
…and that basket can be very fragile. This is what makes diversification so attractive.
But is it really worth doing? Is it too risky?
The Diversification Argument
There are two sides of the coin, when it comes to diversification.
Some people say that you should be really good at one thing and only do that one thing. Others say that you should have a specialty, but be willing to diversify, just in case your one thing is not doing so well, at the moment.
Only you can determine what is right for you. But I personally feel that a limited amount of diversification, in areas that you understand pretty well, can help a lot. So in this post, I will show you three alternative investments and how to use them to diversify Forex trading.
Remember, past performance does not guarantee future results. You are 100% responsible for your own actions. These are just ideas, not trading or investment advice.
I have written about Lending Club in the past, but I believe that this is a great way to diversify your investments. Sure, it is riskier than putting your money in a bank, but the return is also much better and it is not as risky as Forex trading.
If you have never heard of Lending Club before, it is a peer-to-peer lending website. This means that you make personal loans to other people on the site.
Of course, there is some risk and just like with bank loans, borrowers could choose to stop paying. Since your loan is not secured by anything (like real estate), there is really no recourse to get your money back.
You must understand this before you invest in your first loan. But before you get too freaked out, keep in mind the potential benefits.
The benefit is that you get a higher interest rate (minus fees), that a bank would normally get. People who need to borrow money get a lower interest rate (compared to the bank) and don't have to deal with the stuffy bank employees.
However, unlike regular personal loans, you can risk as little as $25 per loan. So if one loan goes belly up, it's not a huge loss. Lending Club puts many people together to fund one loan.
You can also set it up so that a small amount of money is automatically withdrawn from your bank account every month, into your Lending Club account. Then, you just have to login every month or two and allocate your money to new loans.
This takes advantage of the magic of compounding and is super easy to do. I think you will be surprised at how fast your account starts to build momentum.
I first started using Lending Club back in 2011. Since then, I have done 42 loans and there has only been one default.
The screenshot above showing a return of 8.06% is the actual return from my account. My goal was to make between 8-10% and I am hitting that goal.
I could get a higher return, but I prefer to stay on the safer side of the scale. Some loans pay 15%+, but they are also much riskier.
If you want to learn how I choose my Lending Club loans, my complete strategy is in the original blog post. It might not be the best way to do it, but it has worked out pretty well so far 🙂
Forex Signals Services and Expert Advisors (EA)
There are a lot of these sites out there nowadays. Sites like Etoro, MyFxBook and others allow you to track the results of traders on the site. If you feel comfortable with the results, then you can “copy” their trades into your trading account.
Expert Advisors or EAs are automated trading programs that you can download and install on Metatrader to do the trading for you. The program makes all the decisions and you have no input.
These are very appealing to people who are not good traders yet and can seem like the “easy” way to make money. But of course there are risks…
Most times, you do not know anything about a trader or automated program, outside of the track record they publish on the website. You may think that this is enough, but it really isn't.
I believe that you really need to know the trader behind the numbers.
- Are they serious about trading, or is this just a hobby?
- How responsible are they?
- Are they actively maintaining their EA?
- Will they stop trading tomorrow and leave you high and dry?
- What is their risk management like?
It could even be a flat out scam.
How much do you really know about the trader? I feel that this is the biggest risk.
However, the benefits are obvious. You don't have to do any work.
Is relaxing at the beach while you make money, cliche? Of course.
Almost as cheesy as stock photos like this…
But it doesn't make it any less appealing…
Just put some money in your account and you are off to the races! Since the money is in your own account, you can determine when you want to add money and if you want to withdraw your funds. Other investments require that you deposit your money into a company's account.
If you can find the right trader or traders, the returns can be really good. It is similar to investing in a mutual fund or a hedge fund.
I have tried an EA in the past and I ended up net profitable. But I didn't like the fact that:
- I didn't know how the system traded
- I was left to decide which settings were best
If someone is publishing an EA, aren't they supposed to keep it tuned and up-to-date? Since I don't know how the trading system works, how am I supposed to determine the best settings?
That is the downfall of almost all the commercial EAs out there. This is really unfortunate because EAs are so powerful, when in the hands of a capable trader.
But I have recently come across a signal service that I believe is the solution to generic signal services and EAs. It is run by someone I personally know and have tracked for several years.
I am still testing the system in a live account, but the results are pretty good so far. Here are the MyFxBook results for the account.
My results for the month are actually a little better than the signal's results because I joined later in the month and missed a few losing trades.
I will publish my results after I have been using it for awhile. But I feel that this will be a great way for me to diversify my trading and take advantage of the skills of other traders.
But the bottom line is, before you invest in EAs or trade copying services, be sure to get to know the person/people behind signal. If they are questionable or you don't get a good vibe from them, move on.
There is talent out there. You just have to separate the skilled traders from the ones who have simply been lucky.
Learning From Other Markets
What, there are other markets besides Forex?!
As most professional traders say, good trading is good trading. It doesn't really matter which market you trade.
The same principles that will make you a good Forex trader will also make you a good stock or options trader. Of course, the actual strategies will vary, but concepts like solid risk management and being patient are the same.
So it can help to study trading strategies that were built for other markets. You don't necessarily have to trade those markets. But learning something new can give you ideas and get you excited about trading again.
The obvious risk is that you could get distracted with too many different trading systems. I see it all the time.
This is how people get stuck on the Trading Silodrome and usually never get off. They just keep learning new system after new system and never master any of them.
But constant learning can have tremendous benefits, if you understand how they fit into the bigger picture.
When your head is buried in the EURUSD for weeks on end, it can get a little monotonous. At some point, you may think that you know everything about that pair and there is nothing left to learn.
Of course, that is never the case and there is always something to learn. But at that point, you are simply burnt out on the process and need to recharge your batteries.
That is where looking at other markets can give you a fresh perspective. You can examine the same strategy, but I believe that it is actually more beneficial to study an entirely different strategy.
As you probably know…in the past, I have traded almost every major market. Stocks, options, futures, Bitcoin…you name it and I have probably traded it.
However, I have chosen to make Forex my specialty for a variety of very compelling reasons. But it is easy to get stuck in a Forex-focused rut. So from time-to-time, I like to get educated in other markets.
I am currently studying a course by Superman. No, not the comic book superhero, but the stock trader.
His real name is actually Paul Scolardi. He has a phenomenal track record and he is primarily a swing trader.
This is important because while I feel that it is important to study something different, it is also important not to stray too far off the ranch. I know that I am built to be a swing trader, so I need to study other swing trading methods…even in other markets.
You may want to study day trading strategies, and that may be a good diversion. It depends on how your mind works. But I think it's largely a waste of time.
I don't know if I'll trade stocks too. But the education that I'm getting from Paul is a great change of pace and I'm having a lot of fun.
One of the most important things that I look for in a teacher is their trading psychology. What do they do to keep themselves on track?
So figure out how you can keep trading interesting, without getting too distracted. If you have any other ideas about how to do this, I would love to hear about it in the comments below.
So regardless of how your trading is going right now, you should consider diversifying into other areas. This will allow you to leverage the expertise of others and to make income that does not depend on your personal trading.
Diversification may not be for you, but I hope that this post has at least opened your mind to some of the possibilities out there.
If you invest in other things, how do you diversify your income? Share your experience in the comments below…