Correlation
A measure of how two markets move in relation to each other — values range from -1 (perfect opposite) to +1 (perfect same).
During the 2022 dollar bull run, EUR/USD, GBP/USD, AUD/USD, and NZD/USD all hit correlations above +0.90. Traders short all four were effectively making one massive USD-long bet.
Related terms
Diversification
intermediateSpreading risk across multiple uncorrelated trades, assets, or strategies — to avoid having all your eggs in one basket.
Hedging
intermediateOpening an offsetting position to reduce risk on an existing trade — sacrificing some upside to limit downside.
Risk Per Trade
beginnerThe amount of money or percentage of account equity you put at risk on a single trade — usually 1-2% for serious traders.
Position Sizing
beginnerThe math that tells you how many lots to trade based on your account, stop distance, and risk tolerance.
Carry Trade
advancedA trade where you borrow a low-interest currency to buy a high-interest currency, profiting from the rate differential.
Risk-Reward Ratio
beginnerThe ratio between how much you risk on a trade and how much you stand to make — the math that makes trading profitable.