Correlation
a.k.a. Correlation coefficient, Currency correlation
How closely two prices move together, measured from −1 (always opposite) through 0 (unrelated) to +1 (always together).
Correlation tells you whether two markets tend to move in step. The correlation coefficient puts a number on it: +1 means they move together perfectly, −1 means perfectly opposite, 0 means no relationship.
In forex this matters because many pairs share a currency. EUR/USD and GBP/USD often rise and fall together; EUR/USD and USD/CHF often move in opposite directions. Buy both EUR/USD and GBP/USD and you may have one big dollar bet, not two separate trades. Correlations shift over time, so check them rather than assuming.
Hidden double risk
- You buy EUR/USD and GBP/USD, risking 1% on each.
- Their correlation has been around +0.85.
- A sudden dollar rally hits both trades at once.
Bottom line: You really risked close to 2% on one idea: 'the dollar will fall'.
Spreading trades across several pairs and thinking you have diversified when they are all the same dollar bet.
Keep this word for good
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