IC Markets
A trader who opens AUD/USD, NZD/USD and gold long at the same time, each sized at 1 per cent risk, believes they have three separate trades and 3 per cent total risk. On a day when the US dollar simply strengthens against everything, all three lose together, because all three are really the same trade wearing different labels. Correlation is the measure of how much two instruments move together, and ignoring it is one of the quieter ways an account gets over-sized without anyone intending it.
The pairs that move together in Asia
| Pair group | Typical correlation | Why |
|---|---|---|
| AUD/USD and NZD/USD | Strongly positive | Both are commodity, risk-on currencies against the same US dollar leg |
| AUD/USD and gold (XAU/USD) | Moderately positive | Australia is a major gold and metals exporter; the AUD tracks metals prices |
| USD/JPY and USD/CNH | Moderately positive | Both move on broad dollar strength or weakness, though BoJ and PBOC news can decouple them |
| EUR/USD and GBP/USD | Strongly positive | Two major currencies against the same dollar leg, both react to the same US data |
| USD/JPY and gold | Often negative | The yen and gold both attract demand in risk-off moves, moving opposite to a dollar rally |
None of this is fixed. Correlation shifts with the news driving the market on a given day or week, and a central-bank decision in one country can decouple two pairs that normally move together. The table is a starting expectation, not a rule to trade blind.
Why it matters for position sizing
Risk management assumes each 1 per cent trade is an independent bet. Correlation breaks that assumption. Two strongly correlated positions in the same direction behave, in a fast move, much closer to one 2 per cent trade than two separate 1 per cent trades, because the same underlying driver, dollar strength or weakness, hits both at once. The account can be more exposed than the position-sizing math on each individual trade suggests.
Priya opened AUD/USD long and NZD/USD long the same morning, each at 1 per cent risk, seeing them as two separate opportunities. A stronger-than-expected US inflation print sent the dollar up broadly, and both trades hit their stops within twenty minutes of each other. Her account was down close to 2 per cent from what she had budgeted as two independent 1 per cent risks. She now checks whether open positions share a currency leg or a common driver like risk sentiment before treating them as separate risk.
How to check correlation before you trade
- Ask what is actually driving each position. If the answer to "why is this trade working" is the same for two positions, USD strength, risk-on sentiment, gold demand, treat them as one risk, not two.
- Most trading platforms and free tools show a rolling correlation coefficient between pairs; check it periodically rather than assuming last year's pattern still holds.
- When two positions are correlated, reduce the combined size rather than running both at full individual risk.
- Diversify across genuinely different drivers where you can: a USD-strength trade, a risk-sentiment trade and a single-country-specific trade behave more independently than three variations on the same dollar view.
Correlation is not only a multi-position problem. Holding one position and then adding to it after a small pullback, on the same pair, is the same mistake with extra steps: it looks like two decisions but is one enlarged risk.
A quick gut check before opening a second position: if both trades would lose for the same reason, size them as one trade split in two, not as two full-sized trades.
Traders count positions, not risk. Three open trades feels diversified. If all three lose to the same dollar move, it was never three trades. Before adding a third position, ask what would have to happen for all of them to lose at once, and size for that scenario, not for three independent ones.
Frequently asked
What is currency pair correlation?
It is how closely two pairs move together. AUD/USD and NZD/USD, for example, are strongly positively correlated because both are commodity currencies quoted against the same US dollar and tend to react to similar drivers. Correlation shifts with what is currently driving the market and is not fixed.
Why is correlation a risk management issue?
Because two correlated positions in the same direction behave more like one larger position than two independent ones. Sizing each at 1 per cent risk assuming independence can leave the account more exposed than intended if a shared driver, like broad dollar strength, moves both at once.
Which Asian pairs are most correlated?
AUD/USD and NZD/USD are strongly correlated as commodity currencies against the dollar. AUD/USD and gold move together moderately, since Australia is a major metals exporter. USD/JPY and gold often move in opposite directions during risk-off periods.
How do I check correlation myself?
Most trading platforms and free financial data sites publish a rolling correlation coefficient between pairs. Check it periodically, since the relationship shifts with the news currently driving the market, and do not rely on a fixed assumption from months earlier.
Should I never trade two correlated pairs at once?
You can, but size the combined position for the shared risk rather than treating each as fully independent. If both trades would lose for the same reason, reduce the total size across them instead of running each at full individual risk.