Diversification
Diversification means spreading the risk of a portfolio across several assets that are as weakly correlated as possible, so that a single loss has less impact.
Approx. 1 min read · Updated October 9, 2026
What is diversification?
Diversification means spreading the risk of a portfolio across several assets. The trader holds speculative positions in different instruments at the same time, for example shares or currency pairs, which should be as weakly correlated with one another as possible. This distributes the risk across several assets and keeps the portfolio broadly invested, so that the overall result no longer depends on a single position.
The role of correlation
Correlation measures how closely the prices of two instruments move together, on a scale from +1 (always in the same direction) to −1 (always in opposite directions). Positions only diversify a portfolio if their correlation is low; strongly correlated positions behave like one large position.
Example: a trader opens a short position in EUR/JPY. From a diversification point of view, it makes little sense to open a short position in CHF/JPY as well, as the two currency pairs tend to move very similarly. Both trades are essentially a bet on a stronger Japanese yen, so the risk is doubled rather than spread. A position in an unrelated market would diversify far more.
Why it matters for traders
Diversification reduces the risk that comes from individual instruments, but it cannot remove risks that affect the whole market. Correlations also change over time and tend to rise during market crises, when many assets fall at the same time. Traders should therefore check them regularly and limit the total risk of all open positions as part of their risk management and money management. Unlike hedging, which offsets a specific risk with an opposite position, diversification spreads risk across different sources. For long-term investors, it is an important complement to buy and hold.
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More terms.
- Risk ManagementRisk management in trading means deciding how much of the total capital to risk on each trade and across all open positions, and adjusting that risk to market conditions.
- Money ManagementMoney management is the set of rules that determines how much capital a trader invests and risks per trade and in total, with the aim of protecting the account from large losses.
- HedgingHedging is a strategy for protecting portfolios, positions or business activities against adverse price movements with an offsetting position, usually in derivatives such as futures.
- Buy and HoldBuy and hold is a long-term investment strategy in which shares or other assets are bought and held for several years, regardless of short-term price swings.