Correlation
Correlation measures how assets move together. Understanding correlation prevents over-concentration.
Correlation Definition
| Correlation | Meaning |
|---|---|
| +1.0 | Move together perfectly |
| 0.0 | No relationship |
| -1.0 | Move opposite perfectly |
Asset Correlation Table
| Asset Pair | Correlation |
|---|---|
| EUR/USD, GBP/USD | 0.8-0.9 |
| Gold, Silver | 0.7-0.8 |
| Stocks, Bonds | -0.3 to -0.5 |
| Oil, S&P 500 | -0.2 to -0.4 |
| Crypto, Stocks | 0.3-0.5 |
Correlation Rules
Rule: Max 0.7 Same Direction
Don’t have more than 70% correlation in same direction.
Rule: Include Negative Correlation
Add assets that move opposite to reduce risk.
Common Mistakes
1. Same Correlation
Problem: Only correlated assets.
Result: All positions move same.
Fix: Diversify.
Key Takeaways
- Check correlation — Before new position
- Diversify — Add negative correlation
- Limit 70% — Max same direction
- Reduce risk — Through diversification
Related
daily-limits.md >>>
Know correlation. Reduce risk.