Correlation Risk

Key idea

Five positions across five different tickers can still be one concentrated bet if they all move together — same sector, same macro driver, or all correlated to a single index. Real diversification means checking correlation, not just counting the number of tickers in the account.

How to apply it

• Before adding a new position, check whether it's meaningfully correlated with what you already hold (sector, macro exposure, or historical price correlation).
• Treat a basket of highly correlated positions as one combined risk-per-trade calculation, not several independent ones.
• Reduce individual position sizes when adding correlated exposure to keep total combined risk within your normal limits.
• Reassess correlation periodically — relationships between instruments shift over time, especially around macro events.

Example

A trader holds long positions in four different semiconductor stocks, each sized at a normal 1% risk. In a sector-wide selloff, all four hit stops on the same day — the real risk taken was closer to 4% in one correlated bet, not four independent 1% trades.

Checklist

• I checked correlation before adding a new position to existing exposure
• I'm treating correlated positions as combined risk, not independent risk
• I reduced individual sizes to account for shared exposure
• I periodically reassess correlation rather than assuming it's static

Common mistakes

• Counting ticker diversity as real diversification without checking correlation
• Sizing each correlated position as if it were fully independent risk
• Ignoring sector or macro concentration building up across the account
• Never revisiting correlation assumptions as market conditions change