I love it when Forex traders say, “I’m diversified.”.

Because nine times out of 10, when FX traders say they’re “diversified” it means they’re buying or selling pairs like “EUR/USD, GBP/USD, AUD/USD and NZD/USD” in one account.

And they call that diversified? Yeah right.

In reality, traders who “diversify” like this are putting all their eggs in one basket. They’re making several one-way bets for or against the dollar.

If the dollar pushes against you…guess what? It takes down ALL your trades at once. Imagine stop-losses ringing up like a cash register.

On top of that, making one-way bets on the buck isn’t the best idea anyway. The shaky U.S. political climate has the potential to swing dollar trades one-way or another on any given trading day. In fact, a negative or positive piece of news can completely destroy a dollar-based currency trade (more on that in a moment).

So today I want to give you a small alteration in your trading that can help hedge against this dollar exposure, and make sure you truly are diversified just in case the market swings against you.

Dollar Alternatives, Now Available for Reasonable Fees

If we’re talking about true diversification in a FX account, then we need to mention currency crosses.

For those of you who don’t know, currency crosses are simply pairs that don’t involve the U.S. dollar. Some of my favorites include:

• EUR/JPY (Euro vs. Japanese yen)
• GBP/JPY (British pound vs. Japanese yen)
• CHF/JPY (Swiss franc vs. Japanese yen)
• AUD/JPY (Aussie dollar vs. Japanese yen)
• NZD/JPY (New Zealand dollar vs. Japanese yen)
• CAD/JPY (Canadian dollar vs. Japanese yen)
• EUR/CHF (Euro vs. Swiss franc)
• EUR/GBP (Euro vs. British pound)
• GBP/CHF (British pound vs. Swiss franc)
• AUD/CHF (Aussie dollar vs. Swiss franc)
• AUD/CAD (Aussie dollar vs. Canadian dollar)
• EUR/CAD (Euro vs. Canadian dollar)
• GBP/AUD (British pound vs. Aussie dollar)
• AUD/NZD (Aussie dollar vs. New Zealand dollar)
• EUR/AUD (Euro vs. Aussie dollar)
• EUR/NZD (Euro vs. Aussie dollar)

You see, there was a day when these instruments were almost “untouchable” for traders. That was because they were so expensive to trade. As you probably know, all FX brokers charge you the difference between the bid and ask price (or the “spread”) for each trade.

That’s how FX brokers make their money.

Just a handful of years ago, you couldn’t find decent spreads on currency crosses. Spreads and your fees could be as high as 15-60 pips! Fortunately, there have been some major developments in these pairs in just the last two years.

In short, more traders are turning to currency crosses, so the spreads and fees are now much more reasonable – usually under 10 pips per trade. And as a bonus, you get to avoid the news chatter that can sink U.S. dollar trades…

Don’t Let Dollar News Whipsaw Your Trades

So why crosses? Well for starters, they give you a much-needed breather from the U.S. dollar. It means you can place several trades on different areas of the FX market without always depending on the dollar to be the anchor for your trades. So you get true diversification.

Also, currency crosses allow me to invest in certain foreign currencies BUT I don’t have to worry about getting stopped out if some random news about the dollar should arise.

You see, as the world’s reserve currency, the dollar is also the most “used” currency in the FX market. In fact, 90% of the world’s traders are trading the dollar on any given day.

The sheer force of traders watching and trading the dollar means any small piece of news can shift the dollar’s course unexpectedly.

I don’t know about you, but even after 17 years of trading, I can’t predict every time the Federal Reserve, Congress or President Obama will say (or do) something stupid that might shift my dollar-based trades.

Unfortunately, these short- term jerks and spikes can really sink your trades…and can even sink your entire FX account if you’re placing a bunch of one-way bets for or against the buck.

In fact, every time I see U.S news events unfold, it’s almost fun to watch the dollar trades whipsaw back and forth. For instance, take a look below at the EUR/USD on the recent NFP (Non-Farm Payroll) report.

NFP Shakes up EUR/USD with 100 Pip Whipsaws in BOTH Directions!

This happens more times than I can count.

It would be one thing if you got “one- way” directional moves. But in many U.S. news events you will get what I call whipsaws back and forth. You’ll get a sizable move in one direction that looks so strong, you’re convinced that it’s the direction to trade.

About the time you get into the trade, the trade reverses just as strongly as it moved formerly and stops you out.

Improve Your Winning Streak Just by Switching to Currency Crosses!

I’m sure many of you have been there, where news events knock out your dollar trades. That’s why I want to show you how currency crosses respond to such events. Take a look at the AUD/NZD (Aussie vs. kiwi) pair below, and you’ll see what I mean…

Meanwhile…AUD/NZD Hardly Knew NFP Existed!

It looks like AUD/NZD didn’t even notice the U.S. dollar news.

While EUR/USD whipsawed 100 pips in BOTH directions on traders…AUD/NZD may have gone a max of 25 pips in either direction.

Better still, this news did NOT disturb the uptrend in the AUD/NZD pair.

So any trader could have easily stuck to their guns on this trade and traded based on the pair’s fundamentals and technicals. The trend was up and so they could continue to trade regardless of the U.S. employment report.

It’s amazing how much excess volatility (and uncertainty) you can take out of a trade when you move away from the U.S. dollar.

Just FYI: The AUD/NZD happens to be my favorite pair right now. My subscribers already bought and sold this pair for a nice 99% profit.

The reason it’s done so well? I was able to do my analysis without worrying about how U.S. news event would affect the trade.

So if you’re having problems in your trades right now and getting stopped out a lot…I encourage you to take a look at currency crosses, and truly diversify your account.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. There’s really no limit to what you can do with the right currency cross in your FX account. To learn more about how to make currency crosses work for your account, pick up a free copy of my latest report here.

A 17-year veteran in the financial markets, Sean Hyman has been a senior writer for FX University Daily since 2007, and a currency trader since 2001.