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Correlation-Adjusted Exposurefive dollar pairs is one trade

Evidence: StrongIntermediateRisk · Portfolio

An account holding long EURUSD, long GBPUSD, long AUDUSD, short USDJPY and short USDCHF believes it has five positions at 1% each. It has one position at something close to 5%, and it will discover this on the day the dollar moves.

This is the most common way a disciplined retail account still blows up: every individual rule was followed and the total was never computed.

This is a sizing rule, not a trade. It sits on top of whatever entries you run, and its effect is on the shape of the equity curve rather than on whether any individual trade wins.

Applies to
Any account holding more than one position at a time
Timeframe
Any · correlations re-estimated monthly
The test
Group positions by shared driver, then sum the risk inside each group
Typical setting
Cap each group at the risk you would allow a single trade — 1% to 2%
Tools
A correlation matrix over 60 days of daily returns · or, failing that, common sense about shared currencies

Valid setup

RK-04 · CORRELATION-ADJUSTED EXPOSURE — ACCOUNT EQUITY five positions at 1% each, all of them the same bet on the dollar — and the day that bet moved EQUITY 93.5 97.5 101.5 105.5 109.5 113.6 117.6 FIVE 'INDEPENDENT' POSITIONS — all long the same thing ONE DOLLAR MOVE — ALL FIVE LOSE TOGETHER RECOVERY, WITH THE GROUP CAP NOW IN PLACE peak starting balance the loss the position list said was impossible 1 2 3 115.0 100.0 96.0 ① The platform shows five positions at 1% risk each ② They are one position at close to 5% ③ Every individual rule was followed correctly ④ Group by shared driver, then cap the group ⑤ The sixth correlated trade is refused, not shrunk ⑥ In a crisis, assume every group is one group

Exact rules

When it applies

  • Before opening a position, compute the total risk of everything already open that shares a driver with it.
  • Grouping, in order of usefulness: shared currency, shared risk regime (commodity currencies, safe havens), shared strategy type.
  • If the group is already at its cap, the new trade does not get taken. Not taken smaller — not taken. A half-size sixth correlated position is still the same bet.
  • Re-estimate the correlations monthly. They change, and they converge towards one in exactly the conditions where that matters most.

The risk cap

  • Cap per group at roughly what you would risk on a single trade.
  • Cap total open risk across all groups at 4% to 6% for most retail accounts.
  • In a genuine crisis, assume every group is one group. Size so that the total across everything is survivable even then.

Sizing and review

  • Review monthly: take your five largest daily losses and check how many positions contributed to each. If one driver explains most of them, the grouping is not working.
  • Deliberately holding uncorrelated strategies — a trend book and a reversion book, say — is the productive version of this rule. It is the only free improvement available to a trader.
  • Diversification is the one thing in trading that reliably improves risk-adjusted returns without requiring you to be right about anything.

Build Correlation-Adjusted Exposure

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Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.