Overexposure is one of many mistakes traders, beginners and professionals, usually make. It happens when the trader takes more risk than their trading account can handle. For instance, if you only have a small amount left in your capital, and still place an order in a stock using a high percentage of your money, it’s almost guaranteed to result in significant losses.
If you’re still in the earlier stage of being a trader, you might have already encountered the most popular risk management tip— diversifying your portfolio. As the saying goes, “Don’t put all your eggs in one basket. So, whenever you trade, you should think first before placing trades. Aside from that, here’s a list of tips you should keep in mind to avoid overexposure.
1. Understand Your Risk Tolerance
How much risks are you willing to take? Before diving into any trade, you should know if you can still move on when you lose. It shouldn’t have a significant impact on your life or emotions, as trading can be a non-stable way of investing, you should be aware of the risks of placing a specific trade every time you do so.
For some beginners, trading is like gambling; they can just order using their gut feeling. Unfortunately, when it comes to trading, you should be well-informed before making decisions, and understanding your risks is one of the things you should know about.
2. Diversify Your Portfolio
As mentioned, diversifying your portfolio is one of the things you hear and read over and over again as a trader. As a fundamental aspect of risk management, it allows you to balance your trades by spreading your investments in the most ideal way.
Sure, if you put all your capital into a single trade, it can magnify your gains. However, don’t forget that it can also magnify your losses. At the same time, spreading your trades without any information about the market isn’t also a great idea. So, aside from diversifying trades, you should also stay updated on the latest market news.
3. Use Stop-Loss Orders
Another risk management tip is to use stop-loss orders. It’s when your trade automatically closes or sells when it encounters your pre-determined price. Aside from limiting your potential losses, it also helps traders avoid being overexposed.
Besides, if you don’t use stop-loss orders, there’s a chance that your trade stays open longer than you expected. When that happens, there are higher chances that you’ll lose your capital.
4. Limit the Leverage Use
Leverage helps traders to trade larger positions while paying for a small amount of capital. CFD trading is one of the most popular ways to trade using leverage. But as a trader opts for CFD trading, they also increase the risk of overexposure.
The higher leverage you use, the higher the chance of being overexposed, which isn’t a good thing given that you’re planning to obtain a great portfolio. Meanwhile, those who succeed know how to use lower leverage ratios as a way to manage risks.
5. Set Position Size Limits
Another well-known risk management tip is to set a limit to your position size. If you risk around 1% of your capital per trade, it won’t cost you a lot even if the market doesn’t go in your favour. Besides, it’s one of the rules of thumb is risk management. So, the more you incorporate this rule in your trade, the lesser the chance of being overexposed.
6. Regularly Review and Adjust Your Strategy
Building a trading strategy isn’t a one-time thing. You don’t use the first trading strategy you’ve created for a long time. Instead, you need to change once in a while, depending on how the financial markets are doing and other factors that might affect your trading strategies.
With this, you need to be aware and stay updated on all the factors that can significantly affect your trades. But the moment you’ve updated your trading strategy, you should stick to it no matter what.
7. Always Check Your Emotions
Emotional trading is one of the things you should avoid that can prevent you from overexposure. As mentioned, once you develop your trading plan, it’s your job to stick to it. Don’t let your emotions be in control, even if there are sudden changes in the market conditions, or you lose on a trade you thought you’d win.
If you think you’re too emotional to stick to your trading plan, you can step out for a while, calm yourself, and get back once your mind is no longer clouded.
8. Educate Yourself Continuously
Aside from staying updated with the current market conditions and looking after other factors that can affect your trades, you also need to continuously educate yourself. Besides, you may already know how fast everything changes due to technological advancements, so always look out for new and old things you should be aware of.
Fortunately, it’s easier to learn new things nowadays since everything can be found online through social media platforms, blogs, videos, and podcasts. However, one thing you should be careful about is to ensure that your resources are valid.
Final Thoughts
Avoiding overexposure in trading can be complicated, especially for beginners. You don’t know where to start or if you’re doing the right thing. Fortunately, by incorporating these tips, you can gradually improve your trading plan and avoid being overexposed.
ABOUT THE AUTHOR
Aliana Baraquio has over 5 years of experience as a writer and market analyst. She specialises in developing beginner-friendly trading techniques and tutorials. Additionally, she suggests FP Markets as the top broker for trading CFDs and Forex.