⚠️ Risk warning: CFDs and leveraged forex are complex instruments with a high risk of losing money rapidly. Most retail accounts lose money. This content is education only, not investment advice or a recommendation.
Risking 1% per trade feels safe. But if your three open trades all depend on the US dollar falling, a single dollar move can hit all three at once. Correlation is how you notice that before it happens.
What correlation measures
The correlation coefficient runs from −1 to +1. Near +1, two markets have tended to move in the same direction; near −1, in opposite directions; near 0, with no consistent link. It describes the past over a chosen window, for example the last 50 daily candles. It does not say how far a market will move, and it can change quickly.
Relationships traders watch
- EUR/USD and GBP/USD have often moved in the same direction, because both are priced against the US dollar.
- EUR/USD and USD/CHF have often moved in opposite directions, because the dollar sits on opposite sides of the pair.
- Gold and the US dollar have often moved against each other, since gold is priced in dollars, but the link weakens or flips at times, for example during periods of fear when both can rise.
- Stock indices such as the S&P 500 and the DAX often rise and fall together on global risk mood.
Treat these as tendencies that you check on current charts, not as fixed rules.
You buy EUR/USD, buy GBP/USD and sell USD/CHF, each risking 1%. On paper that is three trades. In practice all three win if the dollar weakens and all three lose if it strengthens. Your real exposure is roughly one 3% bet against the US dollar. If your plan caps open risk at 2%, this combination breaks the rule even though each trade on its own is fine.
Managing it
- Group your trades by driver. Before entering, write which currency or theme each trade depends on (USD, EUR, risk mood, oil).
- Cap risk per driver. For example, no more than 2% at risk on trades that all depend on the dollar.
- Choose the best of a group. If EUR/USD and GBP/USD give the same signal, take the cleaner chart rather than both, or split the risk between them.
- Remember gaps and news. A single release, such as US inflation, can move every dollar pair at once, so correlated positions should respect your news rule.
Correlation is not a hedge you can rely on. Holding two markets that “usually” move apart does not guarantee one gains when the other loses.
This lesson is educational. It is not advice to trade, and correlations shown on any chart are historical, not predictions.
🛠️ Practice task
Use a charting platform such as TradingView. This is for practice, not for placing a trade.
- Open a daily chart of EUR/USD and add the Correlation Coefficient indicator with GBP/USD as the second symbol.
- Note the current value, then change the second symbol to USD/CHF and note it again.
- Compare gold with the US Dollar Index (DXY) and note whether the value has changed sign in the past year.
- Write down three trades you might take and group them by driver (USD, EUR, risk mood, oil).
- Add up the risk in each group and check it against the maximum open risk in your trading plan.
✍️ Quick quiz
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