Community Forex Questions
Example of overexposure
Assume you have a $100,000 trading portfolio and decide to invest in commodities and forex, investing 25% in copper, 25% in gold, and 50% in GBP/USD.
Despite investing the same amount of money in each asset class, you would be extremely overexposed in the forex market. This is due to the increased risk associated with forex trading due to the extreme market volatility.
Despite investing the same amount of money in each asset class, you would be extremely overexposed in the forex market. This is due to the increased risk associated with forex trading due to the extreme market volatility.
Overexposure in trading occurs when a trader risks too much capital on a single trade or a correlated group of trades, increasing vulnerability to market fluctuations. For example, imagine a trader with a $10,000 account placing $5,000 on a single forex pair, such as EUR/USD, expecting it to rise. Simultaneously, the trader allocates another $3,000 to EUR/JPY, also betting on the euro's strength.
If the euro weakens due to unexpected news, both trades suffer significant losses, potentially wiping out most of the account. This scenario highlights overexposure, as the trader concentrated too much capital on euro-dependent positions. Proper risk management, such as position sizing and diversification, helps prevent such situations, ensuring a sustainable trading approach over the long term.
If the euro weakens due to unexpected news, both trades suffer significant losses, potentially wiping out most of the account. This scenario highlights overexposure, as the trader concentrated too much capital on euro-dependent positions. Proper risk management, such as position sizing and diversification, helps prevent such situations, ensuring a sustainable trading approach over the long term.
Oct 19, 2022 12:08