When trading stocks, you do not want to be overexposed by investing too much into just one place. Specifically, This happens when a trader makes the technical mistake of investing too much in a particular opportunity.
While increasing exposure offers a chance for a great profit, it also leaves you vulnerable to greater risk. When a trader believes that a trade’s potential profit is very high, they may raise their exposure to unwise levels. Almost all trades involve risk, but putting yourself in an overexposed position may end in big losses, even when you’ve taken measures to limit your risk.
Normal exposure to the market refers to the amount you can afford to lose in a single trade. When you are not prepared for the loss and lose more than you can afford, that is when overexposure happens.
Some causes of overexposure are:
- When you have purchased too many shares at one time without taking the time to understand the rhythm of the stock.
- When you are trading stocks that do not meet others’ stock-selection criteria.
How to avoid risk
Handle your emotions
Emotions can affect your trading both positively and negatively. Regardless, try to avoid trading when emotions are high.
Do not be sentimental
Do not trade or purchase stock for sentimental reasons. Just because a stock was profitable for you in the past does not mean it will be profitable for you in the future.
After you enter a trade, give it time to react. The market needs time to move, so do not trade your stock just because nothing happened right away.
If you remain calm, it is easier to think clearly. It helps to go in with a plan, but you have to stick to it. Also, trading in smaller sizes can help reduce stress.
Be ready and willing to act on a moment’s notice. Your chance to make a move on a stock could be a very small window. So if you do not act, then you will miss your opportunity. It is easier to make quick decisions when you understand the stocks you are going for, so do your research ahead of time to help you with this.
FOR MORE INFORMATION REGARDING HOW TO AVOID OVEREXPOSURE IN A MARKET UPTURN CONTACT MIRAMONTES CAPITAL.
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