A definition of Market Exposure, expressed as a percentage of total portfolio holdings, is the total funds invested in a particular type of security and/or market sector or industry. However, the software QiT uses (Amibroker) defines exposure percentage as, “Market exposure of the trading system calculated on a bar by bar basis. Sum of bar exposures divided by the number of bars. Single bar exposure is the value of open positions divided by portfolio equity.”
To get single bar (if using daily charts, one bar is one day) exposure, divide total equity by the value of all currently open positions. For example, if on Oct 1, 2009 a $50,000 portfolio had 5 open positions worth $35,000, the single bar exposure is 35,000/50,000 or 70%. Calculate every bar. So for system exposure, you just add up all the bars divided by the number of bars.
In other words, this metric will tell you how much on average a portfolio was at risk during the backtest timeframe.
This is important for the simple fact the less exposure, the less chance a trader has of encountering the black swan events that will happen in his/her trading career.
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