A measure of how two markets move in relation to each other — values range from -1 (perfect opposite) to +1 (perfect same).
Correlation measures how closely two assets move together. A correlation of +1.0 means the two assets move in lockstep — when one goes up, the other goes up by the same percentage. A correlation of -1.0 means they move in perfect opposition. A correlation of 0 means there's no relationship.
In forex, correlation is critical for risk management. EUR/USD and GBP/USD have a correlation around +0.85 — they move very similarly. If you're long EUR/USD AND long GBP/USD, you're not actually diversified. You have one big trade in two costumes.
Correlations change over time. The 2022 USD rally pushed EUR/USD and GBP/USD correlation above +0.95 — they basically became the same trade. In quieter regimes, the correlation drops to 0.7 or lower. Always check current correlations before assuming diversification.
During the 2022 dollar bull run, EUR/USD, GBP/USD, AUD/USD, and NZD/USD all hit correlations above +0.90. Traders short all four were effectively making one massive USD-long bet.
Frequently asked about correlation
What is a correlation in trading?+
A measure of how two markets move in relation to each other — values range from -1 (perfect opposite) to +1 (perfect same).
When will I see correlation used in real trading?+
On correlation matrices in trading platforms and on macro analyst reports. Updated daily on most professional tools.
What is the most common mistake traders make with correlation?+
Assuming "different pairs = diversified." Correlated pairs are the same trade in disguise. If two pairs are above +0.8 correlation, they're effectively one position.
What do experienced traders know about correlation that beginners don't?+
Cap your aggregate exposure across correlated pairs. If your max risk per trade is 1%, then your total risk across EUR/USD + GBP/USD + AUD/USD shouldn't exceed 1.5% — they all share USD as the common factor.
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