Correlation limits: how much same-direction risk do you allow?

Three trades, one underlying dollar bet — correlation turns diversification into concentration. The fix is a rule: total risk across correlated positions capped at, say, 2%.

Correlation limits: how much same-direction risk do you allow? — currency correlation diagram
Two currency pairs moving in and out of correlation

What's your cap?

  • how you group correlated positions
  • the total-risk limit you enforce
  • the time correlation caught you out
Correlation limits: how much same-direction risk do you allow? — risk-reward diagram
A risk-reward ratio of 1 to 2

The correlation guide explains how to measure it properly.

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