Lessons › Risk and money management › Correlation: hidden double bets

World 5 · Risk and money management · lesson 13 · level 4

Correlation: hidden double bets

If two trades always move together, holding both is like making one bigger bet.

In one line

If two trades always move together, holding both is like making one bigger bet.

Explained simply

Imagine two kites tied to the same string: when the wind drops, both fall at once. Trades in assets that move together work like that. Holding both feels like two bets, but it behaves like one big one.

The lesson

Correlation measures how closely two prices move together, from +1 (always together) to -1 (always opposite). Positions in highly correlated assets, such as two large coins or two banks in the same country, tend to win and lose together, so the real risk is bigger than it looks. Correlations change over time and often jump higher during market sell-offs. Careful traders add up the risk of correlated positions as if they were one trade.

A worked example

Illustrative example: a trader with a balance of 10,000 opens three trades, each risking 1%, which is 100 each (10,000 times 0.01). Two are in large coins that usually move together, so a sell-off can hit both stops at once for a loss of 200 (100 plus 100), or 2% of the balance (200 divided by 10,000 times 100). If all three fall together in a crash, the loss is 300 (100 times 3), which is 3% (300 divided by 10,000 times 100).

The same idea at four levels

1. Beginner. Correlation shows how closely two prices move together.
2. Foundation. It runs from +1 (always together) through 0 (no steady link) to -1 (always opposite).
3. Intermediate. Trades in highly correlated assets, like two large coins, tend to win and lose together, so their risks add up.
4. Advanced. Count correlated positions as one bet and keep their combined risk within a limit, such as 1.5% of the balance.
5. Expert. Correlations drift and often rise toward +1 in sell-offs, so experts plan for the crash case, not the calm-market number.

Mistakes to avoid

• Counting positions in the same sector or coin group as separate risks.
• Assuming correlations stay stable in a crash, when they tend to rise.
• Thinking more positions always means less risk.

Goal of this lesson: Recognize when several positions are really one bet because their prices move together.