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%.
What's your cap?
- how you group correlated positions
- the total-risk limit you enforce
- the time correlation caught you out
The correlation guide explains how to measure it properly.
Background: Currency correlation: why EUR/USD and GBP/USD often move together
Pairs that share a currency or an economic driver tend to move in step. How correlation works, why it changes and how it can quietly double your risk.
Which currency pairs are positively correlated?
EUR/USD and GBP/USD, and AUD/USD and NZD/USD, often move in the same direction, although correlations change over time.
Why does correlation matter for risk management?
Holding highly correlated positions is similar to holding one bigger position. A single move can hit several stops at once and multiply the loss.
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