Correlation
Correlation measures how closely two assets move together, from −1 (opposite directions) to +1 (same direction). It reveals hidden risks.
Two strongly correlated pairs, such as EUR/USD and GBP/USD, often react to the same news. Buying both is almost like doubling the same position. Conversely, EUR/USD and USD/CHF have historically tended to move in opposite directions.
Correlation is not fixed: it is measured over a given period and changes with the backdrop. Gold and the dollar, or stocks and bonds, can see their relationship flip depending on the market regime.
Before opening several trades, ask yourself what risk they share. Three 1% positions on correlated assets can add up to a real risk close to 3% on a single idea.