Correlated pairs: don't double your risk by accident

@founder · Sep 19, 08:02 AM

EUR/USD and GBP/USD often move in the same direction because both are quoted against the US dollar. If you go long on both, you have not opened two independent trades: you have effectively doubled your exposure to one idea, the weakness of the dollar. Examples of commonly correlated pairs: - Positive: EUR/USD and GBP/USD; AUD/USD and NZD/USD - Negative: EUR/USD and USD/CHF (they often move in opposite directions) How to manage it: - Count correlated positions as one when you calculate your total risk - Or cut the size of each so the combined risk stays within your limit - Check the correlation over your own timeframe, because it changes over time and is never perfect Do you use a correlation matrix, or do you simply limit yourself to one position per currency? Note: educational content, not financial advice. Trading involves risk.