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DIVERSIFICATION THROUGH TRADING PERIODS
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So far, we have introduced you to various products to take advantage of foreign currency markets through the spot forex and futures and now through exchange traded funds via the stock market. Many traders and in vestors need to incorporate diversification into their arsenal of invest ments. Many believe the best means to diversify is through investments that have little to no correlation with each other with reserve cash balance, such as stocks, bonds, real estate, commodities, forex, and cash parked in a certificate of deposit (CD) or government Treasury bill (T-bill).

If you have a passion for currency trading, then in order to utilize di versification to the extreme, consider your overall allocation of your in vestment strategies within this sector. Depending on your time constraints, you may only be able to participate to a limited extent in day trades during the European session or early morning U.S. hours as economic numbers are released. As such, you should also have devotion toward holding posi tions as they go into a strong trend mode and should carry a position for more than a few days. This is known as a swing trade. Then, if you want to really capture a longer-term market trend, finding the right vehicle and strategy will allow you to hold a longer-term position. Let's define what I consider the three important time periods and classifications of a trade.

1. Day trade—1 minute up to 24 hours.

2. Swing trade—2 days to 10 days.

3. Position trade—10 days to 1 year or longer

Day traders can use the forex or futures markets for small price swings. Swing traders can also use the forex and futures markets but can also im plement an option strategy, such as a long call or a long put. This is a good consideration if you want to take advantage of establishing a position ahead of a major economic report, such as the Monthly Jobs number or a central bank meeting where you expect an interest rate adjustment to cre ate a price shock in the market. For longer-term position trading where you would want to take advantage of a fundamental policy change or a technical trading program, you have several doors open to you besides just trad ing spot forex. You can implement an options strategy as an outright trade or use options as a hedge to reduce your risk exposure, which in turn can reduce your margin requirements. Also, you can invest in an ETF and grad ually add positions without excessive risk exposure; and because ETFs have no time decay element, such as options on futures, you can really hold onto a position for a very long time. In a perfect world, I would say that a trader's time factor would limit him or her to a percentage breakdown to al locate resources to trading forex as I indicate in Figure 1.5—25 percent to day trading, 40 percent to swing trading (since a majority of significant market moves happen over a period of 3 to 10 days and then enter in a con solidation period), and 35 percent to position trading (to account for slow periods, time off, and vacations).

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