Correlations: why three trades can be one
In this lesson you'll learn
- What correlation is and how strong it can be
- Common correlated groups
- How to count real risk across trades
Markets move in groups
Correlation measures how closely two markets move together, from +1 (always together) to −1 (always opposite). EURUSD and GBPUSD are usually strongly positive; EURUSD and USDCHF are usually strongly negative.
Common groups
- The dollar trade: EURUSD, GBPUSD, AUDUSD, NZDUSD and gold often move together against the dollar.
- Risk-on / risk-off: stock indices, AUD and NZD tend to rise together in good moods; the yen and gold often benefit in fear.
- Commodity currencies: CAD with oil, AUD with metals and China.
Counting real risk
Buy EURUSD, GBPUSD and XAUUSD at 1% each and you haven't made three bets; you've made one bet against the dollar of about 3%. If the dollar jumps on news, all three lose together.
Rule of thumb: treat strongly correlated trades in the same direction as one position, and keep their combined risk within your per-idea limit.
Correlation changes
Correlations are tendencies, not laws. They can weaken or flip during big events. Check recent behaviour rather than relying on a table from years ago.
Common mistakes
- Opening the same idea on four pairs and calling it diversification.
- Hedging with a pair that's only weakly correlated.
- Assuming old correlations still hold.
Check yourself
1. Correlation of −1 means…
2. Long EURUSD, GBPUSD and gold at 1% each is closer to…
3. Correlations are…
Key takeaways
- Correlated trades in the same direction are one bet.
- Count combined risk per idea, not per trade.
- Check correlations again during big events.
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Education, not advice. Goldman Academy teaches how markets and tools work. Nothing here is a recommendation to buy or sell, and no lesson promises profits. Trading leveraged products carries a high risk of losing money; only trade money you can afford to lose. · Written by Goldman Academy, reviewed by Faisal