Orders & Risk
Correlation
How closely two markets move together, scored from +1.0 (identical moves) to −1.0 (opposite moves). EUR/USD and GBP/USD are strongly positive; EUR/USD and USD/CHF are strongly negative. Correlated positions multiply risk without feeling like it.
Also called: correlated, correlations
In practice
You are long EUR/USD and long GBP/USD, thinking you have two separate trades. Because the pairs are ~85% correlated, you really have nearly one doubled bet on the dollar — if EUR/USD falls on a USD spike, GBP/USD almost certainly falls too, hitting both stops at once.
Why it matters for traders
Correlation is the hidden way traders accidentally over-risk, because two 'different' trades can be one bet in disguise. Checking correlation before adding a position keeps your true risk honest and prevents the common disaster of several correlated stops firing on a single news move.
Common pitfall
The mistake is opening several pairs that look different but are really the same dollar bet, and sizing each at 1% as though they were independent — so a single USD move risks 3% or more. Always check correlation before adding a position, and cap total correlated exposure as one combined risk. Also remember correlations shift in stress: pairs that usually diverge can suddenly move together during a shock, so revisit them, don't set-and-forget.
Lessons that use this term
- Currency correlation basics
Why EUR/USD and GBP/USD move together, why EUR/USD and USD/CHF move opposite, and how correlated trades quietly multiply your risk.
- SMT divergence
Reading divergence between two correlated instruments when one fails to confirm the other's high or low.
Related terms
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