Understanding exposure is another important element in trading. The reason being is if not understood right can mean that a trader can be taking excessive risk when pairs correlate and give multiple signals at the same time. Firstly do you know what exposure is in Trading? If not, that is okay let me explain it for you more..
What is Exposure Exactly?
Exposure is the principle risk a trader takes when opening multiple signals or trades in there account before the management phase. It is a name used to describe the risk that a trader is taking, whether it be two trades or five. Now, while this may seem like a normal concept there are aspects to consider when active trades go beyond a certain point. To describe it in detail let’s take a look at if there were more than 2 trade signals available in the market at the same time. In this example let’s say they are all correlated. Say a buy signal on EURUSD, a buy signal on GBPUSD, a buy signal on AUDUSD and lastly a buy signal on NZDUSD..
So now here is the question, do you take them all or do you consider exposure in the equation?
If so, let me explain why you should not take all the trades at the same time and why you should limit exposure to 2 ( recommended ) signals at a time before management phase.. The reason being is each one applies risk to a account and each one is correlated with the US dollar value. Because of that reason it means it is possible if US dollar increases in strength for some reason unexpectedly that one could lose all trades because of that one factor.
Now that is not to say us as traders cannot have many open trades open at a time, however limiting the trades before a management phase is recommended. Also that does not mean that a trader cannot have 5 or 6 or even more trades active and not have exposure in check either. The reason being is once a trade is locked in and risk free ( breakeven ) during the management phase then that trade signal is seen as going from whatever risk level you had set to a zero level exposure risk level. Meaning now that trade has no exposure.
In the instance of a 2% risk trade signal that would mean going from 2% exposure to 0% exposure once the risk free aspect of your trade management has been activated.
– As an example, once a trade you are managing is at breakeven or once a trade has taken off half or more partial profits beyond a 2 to 1 risk to reward phase, then it has no exposure ( no risk of loss on remaining held position ). These types of open positions can then be ignored when evaluating exposure on the account.
Above Video – Understanding Exposure in Trading. In the video above I explain it in even more detail and break down the terms and concepts to be aware of as well.
Overall and to summarize, by keeping your exposure low, controlled and by managing your risk in the right way ( money management ), it can help protect a trader from unexpected excessive losses.
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