Can Trade Copiers Help Prevent Market Overexposure?  

Market overexposure is a potentially serious risk that even experienced traders must manage. Over-concentrating in a single asset, sector or even trading style leaves you vulnerable to sudden, downward market shifts.

The two standard ways of mitigating market overexposure are position sizing and portfolio diversification. Maintaining correct sizing and diversification in one trading account might be quite manageable, but it can become quite challenging when trading across multiple accounts. That’s where an advanced trade copier like Duplicate Account Actions helps.

Understanding Market Overexposure

Market overexposure certainly occurs when you hold too large a position in a single equity, but that’s far from the only potential overexposure risk. There are several different issues that can result in being overly vulnerable to dips, corrections and recessions:

• Single Asset Concentration: Allocating a disproportionately large percentage of your capital to an equity (or commodity, currency, etc.) leaves you exposed to a sudden crash in that asset. A poor earnings report, unexpected bad news or other sudden reaction could result in a large loss. Even something as simple as college basketball star Zion Willimams’s shoe failing resulted in an immediate 1.7% drop in Nike’s stock price.
• Single asset concentration is something every trader must be aware of, but one that newer trades and gamblers tend to be at particular risk of. Just a slight sudden downturn can be especially problematic if you trade options on margin.
• Sector Concentration: Overweighting your portfolio in a particular industry (e.g., technology, energy, financials). Correctly sizing different individual positions won’t necessarily prevent you from becoming overly concentrated in a sector. Small positions in 4 different energy stocks could easily leave you overexposed to that sector, for instance.
• Sector concentration is something that all active traders can struggle with. There’s often a temptation to capitalize on short-term opportunities within a single industry.
• Strategy Concentration: Relying too heavily on a single trading style (e.g., day trading, swing trading, trend following). A single bad day or week could wreak havoc, especially if trading on margin.
• Even successful day traders and swing traders probably should have a retirement account where they hold individual investments for longer periods.
• Correlation Risk: Holding multiple assets that tend to move in the same direction, effectively amplifying your exposure to a particular market trend. This is most common within individual sectors, but also can be a risk across sectors. Electric vehicle stocks and lithium commodities are often fairly correlated, for example.
• Like sector concentration, correlation risk can be an issue when capitalizing on a specific opportunity.

Using Diversification and Position Sizing

Diversification is the antidote to market overexposure, along with related position sizing.

Position sizing refers to how much of your portfolio is allocated to any one investment. Exactly what percent of your portfolio should be in a single investment depends on your strategy and risk tolerance.

Whatever percentage you choose, proper position sizing is essential to avoiding single asset concentration. It accordingly also helps address the other three market overexposure risks.

Diversification involves spreading your investments out across different sectors and asset types, thereby avoiding sector concentration and correlation risk. You can also think of diversification across time horizons and trade types, to address potential strategy concentration issues.

The Struggles of Managing Multiple Accounts

Maintaining position sizing and diversification in a single account is straightforward. Maintaining these across multiple accounts becomes much more cumbersome and difficult to do, however.

Manually managing these across multiple accounts isn’t just tedious, but also requires constant evaluation of each account’s portfolio. You have to evaluate the positions in each account and consider the account size, in order to determine how large a trade should be for that individual account. This can be downright exhausting if you’re trading multiple accounts each day that markets are open.

Duplicate Account Actions Offers a Solution

Duplicate Account Actions makes it easy to manage position sizing and diversification across multiple trading accounts. At Affordable Indicators, we’ve developed Duplicate Account Actions to include options that go beyond the standard trade copiers.

Like all trade copiers, it lets you copy trades from a master account to follower accounts. What sets our Duplicate Account Actions apart is the level of customization, which lets you easily manage position sizing, diversification — and ultimately market overexposure risks.

You can use a few different features within Duplicate Account Actions to address the various aforementioned overexposure risks:

• Position Sizing Rules: Set the ratio at which trades in your master account are copied. For instance, you might place an order in a follower account that’s ½ or ¼ the size of what was placed in the master account. You can choose the exact percentage, and choose different percentages for different follower accounts.
• Position sizing rules are how you can address single asset concentration risks in follower accounts. Of course, this also assists with sector and correlation risks in follower accounts.
• Trade Type Rules: You don’t have to copy all trades to all accounts. Certain trade types can be sent to certain accounts, such as option trades to a margin account and stock purchases to a retirement account.
• Adjusting trade type rules is one of the best ways to address strategy concentration concerns.
• Exit Rules: Different exit rules can be set for each account. Customize stop losses, take profit prices, and even tiered exit strategies.
• Managing stop losses and take profit prices may help further mitigate strategy concentration, as you can adjust trades for each account’s risk tolerance. Tiered exit rules help address individual asset, sector and correlation risks — both within individual accounts and across all accounts.
• OCO Rules: One cancels the other (OCO) orders are more complex rules, wherein a trade action in one account cancels an order in another account.
• This more advanced option can be used to address individual asset risks, but is especially good for sector and correlation risks.

You ultimately must develop and follow a strategy that maintains proper position sizing and good diversification. With Duplicate Account Actions, however, you can execute your trades while maintaining position sizing and diversification within accounts and across accounts. Download the advanced trade copier today, to see how these options make managing market overexposure risks at bay.