What is overexposure in trading?
Overexposure in trading is the term used to describe the mistake of taking on too much risk. Typically, it’s when a trader makes the technical blunder of investing too much capital in a single position or market.
Overexposure definition
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Overexposure explained
While the right amount of exposure offers the chance for greater profit from a position, overexposing your capital comes at a huge risk.
Overexposure can happen for multiple reasons.
Firstly, when a trader believes that a position offers high profit potential, they might subsequently put too much money into that opportunity.
And secondly, if a trader has too many positions open in the same market or industry, they can be considered overexposed. So, by balancing their portfolio across positions, markets and industries, traders can avoid this risk.
All trading involves risk but being overexposed can end up increasing the likelihood of taking on significant losses – even if you have risk management measures in place. To avoid overexposure, it is important to take the time to navigate your chosen market and don’t fall into the trap of putting all your eggs in one basket.
Example of overexposure
Let’s assume your trading portfolio is worth $100,000, and you decide to invest in commodities and forex – investing 25% in copper, 25% in gold and 50% in GBP/USD.
Despite the same amount of capital being invested in each asset class, you would be extremely overexposed in the forex market. This is because the extreme market volatility associated with forex trading creates a higher level of risk.
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