Correlation
A measure of how closely two markets move together, from +1 (always in the same direction) to -1 (always opposite). Currency correlations change over time.
The correlation coefficient summarises how two price series have moved relative to each other over a chosen period.
- +1: they moved in perfect lockstep.
- 0: no consistent relationship.
- -1: they moved in exactly opposite directions.
In forex, correlations arise naturally because pairs share currencies. EUR/USD and GBP/USD both have the US dollar as their quote currency, so broad dollar moves push them the same way. EUR/USD and USD/CHF have the dollar on opposite sides, so they have often been negatively correlated.
Why it matters for risk
Correlation can quietly stack your exposure. Buying EUR/USD, GBP/USD and AUD/USD feels like three separate trades but is, to a large extent, one bet against the US dollar.
Worked example
Illustratively, you risk 1% of your account on each of three trades: long EUR/USD, long GBP/USD and short USD/CHF. If the dollar strengthens broadly, all three may hit their stops on the same day, turning three 1% risks into a 3% loss. Had the positions been uncorrelated, a simultaneous loss on all three would be far less likely.
Common misconception
Correlations are not fixed. They are measured over a past window and can change sharply, especially when a single event affects one currency in a pair. A coefficient of 0.85 over the last six months is a description of the past, not a guarantee.
See currency correlation and position sizing for how to account for this.
Not investment advice. This is general information and education, written without knowledge of your circumstances. It is not a recommendation to buy or sell any instrument. Past performance is not a reliable indicator of future results. Trading leveraged products carries a high risk of losing money. Risk warning