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Risk

Correlation — definition & meaning

How closely two instruments tend to move together.

Correlation measures whether two markets move in the same direction, opposite directions, or independently, on a scale from +1 to -1.

Positively correlated trades stack risk — two 'different' positions can really be one big bet. Understanding correlation stops traders from thinking they are diversified when they are not.

The information on Trding.io is for general information only and is not investment advice. Trading involves a real risk of losing money, and most retail traders lose. Never trade money you cannot afford to lose.

Related terms

Diversification
Spreading risk across different assets so no single one can sink you.
Hedging
Opening an offsetting position to reduce risk on another.
Risk-reward ratio
How much you stand to gain compared with what you risk on a trade.
Leverage
Borrowed exposure that lets you control a large position with a small deposit.
Margin
The deposit a broker holds to keep a leveraged position open.
Free margin
The money in your account still available to open new trades.

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