Who it's for — For those who open 5 different trades at the same time believing they have diversified, only to discover they were all betting on the exact same thing.
Exposure is the total sum of market risk you are carrying at any given moment. If you have 3 open trades and on each one you risk 1% of your capital, your total exposure is 3%.
But exposure is not just quantitative, it is also qualitative (correlation). In the Crypto market, or in the stock market during phases of panic, most assets move in the same direction.
In simple terms — If you buy Bitcoin, Ethereum, Solana and Dogecoin, thinking "I have diversified my portfolio", you are deceiving yourself. You are betting 4 times that the Crypto market will go up. If terrible news comes out, they will all go down together. Your real "exposure" to a market collapse is not divided by four, it is multiplied by four.
Managing Maximum Exposure
Just as you have a risk limit for a single trade, a professional trading plan must include a Maximum Simultaneous Exposure Limit (e.g. "I will never have more than 4% of capital at risk at the same time").
If your limit is 4% and you already have 4 open trades of 1% each, you cannot open a fifth, even if you see the setup of the century. Unless you close one of the others first, or move the stop loss of one of the trades to "break even" (zero risk).
Over-night or Over-weekend Exposure
A critical aspect in stock and Forex markets (which close) is exposure during closure. A sudden macroeconomic event (e.g. a war during the weekend) will open the markets with a massive price Gap that will literally jump over your stop losses, turning a 1% risk into a 10% loss. Reducing exposure before the weekend is a golden rule of many Day Traders.
Summary Sheet
- Correlation: Assets in the same sector tend to move in sync. Multiple open trades do not mean diversification.
- Limit: Set a global ceiling. Do not allow the market to heavily punish a single wrong idea across multiple assets.
Links
- max-loss — Maximum Exposure serves to prevent hitting the Max Loss all at once.
- gap — The mortal danger for exposures held while markets are closed.
- bronze-path
Module: Module 4 — Risk before profit
The first skill of a trader is survival.
