Up until this point weve covered most of the personal problems you might encounter as a trader from a psychological perspective. When it comes to emotions, self-control, discipline and self-improvement, you are the one who gets the only focus and the market remains irrelevant from the perspective that those conditions are purely subjective. However, exposure introduces a new dimension that needs to be taken into consideration – the market.
When it comes to exposure, you are once again the main focus, but this time we are talking about you in the direct context of the market. The decisions you make concerning your financial portfolio will be based on the market conditions and, if youve managed to solve the issues weve talked about in the previous sections, the market conditions will account for more than 80% of the decision. However, if you havent, it quite possible that you will let your emotions come in the way and ruin a perfectly good decision with irrational meddling.
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What is exposure? Simply put, exposure is the risk youre taking by investing in a certain sector or security. Its what you stand to lose should things go south. If a large percent of your financial portfolio is allocated in a single sector, then you have a big market exposure, which is not an ideal turn of events if things dont work out so well in the end. This is one of those high risk, high reward scenarios you shouldnt be taking. This is why we said that this time the market plays a crucial role in the decision.
The market is irrelevant to your emotions, your discipline and self-control – those are internal aspects you have to take care of. However, when it comes to portfolio diversification, the condition of the market should be your primary concern and what should determine where you decide to allocate funds. Ideally, you want to have a low exposure. The more diverse portfolio you have, the better. The problem is that its not that simple. Well, it is if you dont let your emotions get in the way.
There is a phenomenon weve observed with many traders where they are hell-bent on investing in a certain security for their own personal reasons, and this causes them ignore the market, good strategies and even good money management. This is not what you want to be doing with your finances. Remember that even though you may not have a boss, trading is still sort of your job and for many – the primary source of income. Its not a game you can afford to lose.
How can you minimize exposure? The easiest way is to make sure that you diversify your portfolio accordingly. If you dont invest a large percent of your capital in a single niche, market, or stock, then you should be fine. Avoid mental traps that make you “overinvest” in something because of personal reasons. Make sure that all your decisions are based on numbers and pure empirical data, not on some emotional response. Follow the market carefully and adapt accordingly. The market will guide you if you allow it. For the purpose, however, you need to see whats there, not what you want to see.
Many traders (especially the more inexperienced ones) form attachments to a certain company or a security and even when it causes them to suffer losses, they would still not let it go. The reasons can be various – it was the first security they started trading, the first company theyve invested in, the trade thats made them the largest profits, etc. The reason doesnt really matter. If you get sentimental about trading, sooner or later youre going to lose.
This is an irrevocable result of forming irrational attachments. The way to avoid is through a diverse portfolio. There really isnt anything more to it. Youre a trader – act line one. If you want trading to be your profession, stop treating it like a game. If you want to make some real money, leave your emotions out of your decisions. You might not like the sound of that, but thats how things work – you need to be rational, you need to be logical and you need to be adamant in following your strategies, your plans and your rules.