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Accounting for Correlated Risk in Trading

Correlated risk occurs when several trades are influenced by the same underlying market factor. A portfolio may contain multiple symbols but still be concentrated in one economic view. Shared drivers can include interest rates, USD strength, global growth, liquidity, and risk sentiment. Examples include equity indices such as the S&P 500, NASDAQ, and DAX; FX pairs such as EURUSD, GBPUSD, and AUDUSD; and commodities such as gold, silver, and oil. Correlations are dynamic, not fixed. The important point is that three trades at 1% risk each are not necessarily three independent 1% risks. Risk should therefore be assessed at the trade-idea or portfolio level as well as the individual-position level.