Sizing across correlated positions
Identify when two open positions are correlated, explain how correlation multiplies real exposure, and adjust sizes across a multi-position book.
Lesson path
Options, Risk Math, and Psychology
Position Sizing in Detail
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Identify when two open positions are correlated, explain how correlation multiplies real exposure, and adjust sizes across a multi-position book.
When two trades are really one trade
Here's a scenario that catches new traders out. You spot a good setup on EUR/USD and risk 1% — that's $5 on your $500 account. Then later that morning you spot another good setup on EUR/GBP, and you risk another 1%. Your trade ticket says two positions, two percent. Your real exposure says one bet on the Euro, two percent of your account in one direction.
Correlation is the math word for this. Two markets are correlated when they tend to move together. EUR/USD and EUR/GBP share the Euro, so they often (not always) move in the same direction when Euro news drives the day. Gold and silver are correlated. S&P 500 and Nasdaq are correlated. Two long tech stocks are correlated. The moment you spot it, your two-trade book becomes a one-bet book in disguise.
What does this do to your sizing? It silently doubles it. If both positions go against you, both stops fire on the same news. You lose 2%, not 1%. That's not catastrophic on a single occurrence, but it stacks. Three correlated longs on Euro pairs at 1% each? You're really running a 3% directional bet that loses 3% on one news headline. Spread across an account, that pattern is how disciplined traders quietly draw down.
The fix is structural, not mathematical. Before opening a new position, ask: what's the underlying exposure? Euro? Tech? Energy? Risk-on? If you already have a position in the same bucket, your new trade isn't a fresh 1% — it's adding to a bucket you're already in. The size of that adjustment is what the next lesson covers. For now, the habit is just: notice the bucket before you click buy. Recap: same underlying = same bet, no matter how many tickers it shows up under.
Knowledge check
Answer before moving on.
1. You're already long EUR/USD at 1% risk. You spot a long setup on EUR/GBP. What's the most accurate description of your real exposure?
2. Which of these is NOT a correlated pair you'd watch for stacked exposure?
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