Risk

Correlation

The degree to which two pairs move together, from −1 to +1.

Correlation measures how consistently two instruments move in the same direction over a period. Near +1 they track each other; near −1 they mirror each other; near zero they are broadly independent for that window.

Pairs that share a currency share a driver, so long EUR/USD and long GBP/USD are largely the same bet on dollar weakness. Correlations also rise during stress, which means diversification measured in calm conditions often disappears exactly when it was needed.

Taught in these lessons

Correlation between pairs — Risk & Position Sizing

Related terms

Risk managementThe discipline of losing small so you survive to trade the good setups.Risk Portfolio heatThe total you would lose if every open stop were hit at once.Risk Currency pairTwo currencies quoted against each other as a single tradeable instrument.Mechanics

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Correlation

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