FX · Managing FX risk · lesson 5 of 9 · 7 min read · David Alexander
The correlated-exposure trap
correlated exposure
Positions in different pairs that share a driving currency move together, so their risks add rather than stand apart: long EUR/USD and short USD/CHF are both short the dollar, and a dollar move hits both stops in the same week of bad luck. Honest risk counting sums exposure per currency across all open positions, not per ticket - two tickets can be one position wearing two names.
Your plan says 1% per trade. You are long EUR/USD at 1% and short USD/CHF at 1%, two pairs, two tickets, two stops. Then the dollar strengthens sharply one afternoon, and both positions lose together, because both positions were the same bet: dollar down.
Why do different pairs move together?
Module 2's charts-rhyme lesson showed the mechanism: pairs share legs. EUR/USD and USD/CHF both contain the dollar, and when the dollar itself moves - a rate decision, a risk-off hour - every dollar pair moves with it, in the directions their notation dictates. Long EUR/USD profits from a falling dollar. Short USD/CHF profits from a falling dollar. One driver, two expressions.
The correlation is not a statistical curiosity that comes and goes. It is built into what the instruments are. Statistical correlations between unrelated pairs do drift; shared-leg arithmetic does not.
How do you count exposure honestly?
Per currency, across every open ticket. List each position as its two legs - long one currency, short the other - and sum the legs. The two-ticket example nets out as double-long euro-bloc against double-short dollar, and the honest risk to a single dollar move is the sum of both tickets' risk, as the worked example prices.
The per-trade fraction from lesson 1 was doing its job on each ticket. The counting failed at the account level, and the account is where the money lives. A per-currency cap - a ceiling on summed exposure to any one currency - is the plan-level rule that closes the gap, and lesson 9 gives it a line in the template.
Is the answer to spread positions out?
The answer is to know what you hold. Summing exposure honestly sometimes tells you to skip a second ticket, and sometimes tells you that the two positions you like are genuinely distinct bets. Either answer is fine; holding two tickets while believing they are independent when they are not is the only failure here. Whether concentration or variety suits a method is a strategy question for module 6 - this lesson only insists the count be true.
Worked example
figures in USDTwo tickets, each sized honestly at 1% of $12,000 with 30-pip stops - and both positions long the same currency once you read the pairs.
- Each ticket was sized correctly alone: 1% of $12,000 is $120.00, buying 0.4 lots at a 30-pip stop.
- Read both tickets' legs: both are the same direction on the shared currency. One driver moves both.
- Count honestly: 2 tickets sharing a driver put $240.00 - twice the plan's per-trade figure - behind a single move. The plan said 1% per idea; this is one idea, counted once.
What this means for you
Before adding any position, write your open exposure per currency, long and short, in one line each. If the new ticket deepens a currency you already hold, size it as an addition to that bet, or skip it - the choice is yours, made with a true count in front of you. The trap was never having two positions; it was believing the count was two when it was one.
Try it yourself
Position size calculator
How much to buy or sell so a stopped-out trade costs exactly what you planned to risk.
Check your understanding
Question 1 of 3
Long EUR/USD and short USD/CHF, both at 1%. What is your exposure to a sharp dollar rise?