When two things move as if they're tied,correlation measures how closely they ride.
A statistical measure of how two currency pairs move in relation to each other.
Positive correlation means they move in the same direction; negative correlation means they move in opposite directions.
In plain words
Correlation measures how closely two prices move together. It is expressed as a number between −1 and +1: near +1 the two tend to rise and fall together, near −1 one tends to rise when the other falls, and near 0 there is no steady relationship.
See it move
Pair A and Pair B move together, the same distance apart
Why it matters
Two positions in strongly correlated pairs behave much like one larger position, so risk can be more concentrated than the number of trades suggests. Correlations are measured from past data and change over time.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A trader is long one standard lot in each of two pairs whose correlation has been +0.9, and both fall 50 pips (invented figures, with a pip worth 10 US dollars in each).
- 1First pair50 × 10 = 500 US dollars lost
- 2Second pair50 × 10 = 500 US dollars lost
- 3Total = 500 + 500 = 1,000 US dollars
The two positions lost together, as a single position of two lots would have.
A common mistake
Correlation is often read as cause, or as permanent. It describes how two prices moved over a past period; it does not show that one drives the other, and it can weaken or reverse.
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Educational information, not investment advice or a recommendation to trade.