Portfolio-level risk across multiple or correlated positions

Risking 1% per trade is excellent discipline — until you hold four trades at once that all depend on the same thing. At that point your real risk isn't four separate 1% bets. It's closer to one 4% bet. Professional risk management happens at the level of the whole portfolio: what are you actually exposed to, and how much can you lose if one idea is wrong?

What you'll learn

• What correlation is and how to read a correlation coefficient
• How to find hidden exposures — to a currency, a sector, or a theme
• Total open risk: capping the sum of what you can lose right now
• How to size correlated positions as a single idea
• Why correlations can't be trusted in a crisis

1. Correlation

Correlation measures how closely two markets move together, on a scale from −1 to +1.

Examples of relationships that have often been strongly positive or negative (they change over time):

• EUR/USD and GBP/USD — often strongly positive (both driven by the US dollar)
• EUR/USD and USD/CHF — often strongly negative (USD on opposite sides of the pair)
• Stock indices in different countries — often positive, especially in sell-offs
• Gold and the US dollar — often negative (see Gold, the US dollar, and real yields)

2. Hidden exposures

Break each position down into what it really depends on.

Worked example: currency exposure

(Illustrative.) You hold three trades, each risking 1%:

Four trades that look diversified are, to a large degree, one bet: the US dollar weakens. A single strong US data release (see Inflation, employment, and growth data) could stop them all out together — a 3–4% loss from one event.

The same thinking applies to themes:

• Long Nasdaq 100 + long a large tech stock + long a crypto asset → one risk-on / rate-sensitive bet
• Long oil + long CAD + long an energy stock → one oil bet

3. Total open risk

Add up the money you'd lose if every open position hit its stop:

Total open risk = sum of (distance to stop × position size) across all open trades

Set a hard maximum open risk in your trading plan (see Building a personal trading plan document) — for example 3% of your account. If a new trade would push you over the cap, you either skip it, or reduce or close another position first.

4. Sizing correlated positions as one idea

A practical rule: treat each theme as one trade, and cap the risk per theme.

(Illustrative rules.)

• Maximum risk per trade: 1%
• Maximum risk per theme (e.g. "short USD"): 1.5%
• Maximum total open risk: 3%

Applying this to the example above: instead of four trades at 1% each (4% on "short USD"), you could take the two best setups at 0.75% each — 1.5% on the theme — and leave room for uncorrelated ideas.

A quick correlation adjustment

If two positions have correlation c, a rough way to think about their combined risk is that they behave like more than one position but less than two:

You don't need precise maths — you need the habit of asking, "If I'm wrong about the big idea, how many of these lose together?"

5. Correlations in a crisis

In calm markets, different assets can move quite independently. In sharp sell-offs, correlations tend to rise: many risky assets fall together as traders cut risk and raise cash (see the "dash for cash" in Safe-haven flows and trading XAU/USD).

What that means for you:

• Diversification is weakest exactly when you need it most.
• Your worst-case loss is closer to total open risk than a correlation table would suggest.
• Keep total open risk at a level you could lose in one bad day without breaking your plan.

Common beginner mistakes

• Counting four USD trades as diversification.
• Never adding up total open risk.
• Relying on old correlation figures.
• "Hedging" with instruments whose relationship isn't reliable.
• Assuming diversification will protect them in a crash.

Key terms

Practice

1. List your current (or last month's) open positions and write the theme each depends on.
2. Calculate your total open risk at the moment of maximum exposure last month.
3. Check the correlation between your two most-traded markets over the last 60 days (many platforms and websites provide correlation tables).
4. Add risk-per-theme and total open risk limits to your trading plan.

Quick recap

• Correlation shows how markets move together — and it changes over time.
• Break positions down to find hidden exposures to currencies, sectors, or themes.
• Cap total open risk and risk per theme, not just risk per trade.
• Size a group of correlated trades as one idea.
• In a crisis, correlations rise — plan for your worst-case loss.