Correlation
Correlation measures how much positions move together. High correlation increases drawdown risk even with many trades.
Definition
Correlation describes how strongly outcomes or position returns move together. If two positions tend to win and lose at the same time, they are correlated.
Why it matters
Correlation is the silent killer of risk plans. A portfolio that looks diversified by number of markets can still behave like one concentrated bet. High correlation increases variance and raises risk of ruin for a given bankroll.
Practical guidance
• Identify common drivers such as the same team, same election narrative, or the same macro release.
• Reduce size when exposures overlap.
• Use diversification as a risk control, not as a slogan.
Common pitfalls
Hidden overlap: Two markets can be different questions but depend on the same underlying event.
Stacking trades: Adding positions after you feel confident often increases correlation at the worst time.