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Proper Exposure Management can be implemented based on one of two rules.

Stable Exposure Management

Stable investment with low risks using the strict 5/15 rule for risk management.

“5/15” refers to the investment percentage in a single trade relative to the investment’s percentage out of the entire portfolio.

For example, if an investor has a $10,000 account, it can allow himself to risk up to 5%, meaning $500 in any single trade, and up to $1,500 of the entire portfolio.

In other words, if he invested with risks $500 in the single trade, he can concurrently open a maximum of two other trades at additional risk of 10%.

The total risk of all open positions must not exceed 15%.

Aggressive Exposure Management

Aggressive trading with high risk.

This involves the more permissive 10/30 rule for risk management.

The more permissive rule allows traders to risk up to 10% on each trade with a maximum of 30% of the entire portfolio.

This rule is intended for Traders prefer aggressive trades or for traders with small accounts, in order to provide them a certain degree of maneuvering room.

For example, if an investor has a $10,000 account you can risk a maximum of $1,000 on any single trade and up to $3,000 of the entire portfolio.

In other words if the Investor risks $1,000 in the single trade, he can open a maximum of two other threads concurrently for additional risk of 20%. Total risk of all trades being no more than 30%.

In general the permissive rules considered to be the highest level recommended for risk management.

It’s best to try gradually reducing total exposure down to the structural level of the 5/15 rule.

Allocation management

The exposure management process leads directly to the next stage.

Allocation management, in affect, the rules of exposure management dictate to the investor the size of the trades he can open.

For example, a passive investor has an account of $10,000 who manages his portfolio according to the 5/15 rule, can risk up to 5% for trade.

Meaning, he will not lose more than $500 if the trader places Stop Loss at a distance of 100 pips.

Similarly an aggressive investor who uses the permissive 10:30 rule, will be able to risk of the 10%.

Meaning $1,000 for trade and therefore will be able to open a trade of $100,000.

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