Portfolio Heat and Correlated Pair Risk
Running 1% risk per trade sounds conservative. Five correlated trades at 1% each is 5% exposure to a single macro event. Portfolio heat management is the risk layer most retail traders never learn.
What Is Portfolio Heat?
Portfolio heat is the total open risk across all simultaneously held positions. Three trades open at 1% each gives total heat of 3%. A single event closing all three at stops produces a 3% account loss in one moment — not three separate 1% losses across different days.
Currency Correlations and Risk Concentration
EUR/USD, GBP/USD, AUD/USD, and NZD/USD are all positively correlated when USD drives market movement. A trader holding four separate longs at 1% risk each is not taking four independent risks — they are taking ~3–4% of concentrated dollar-directional risk with the illusion of diversification.
Key Correlation Reference
| Pair A | Pair B | Typical Correlation |
|---|---|---|
| EUR/USD | GBP/USD | +0.75 to +0.90 |
| EUR/USD | AUD/USD | +0.60 to +0.80 |
| EUR/USD | USD/JPY | −0.70 to −0.90 |
| EUR/USD | USD/CHF | −0.85 to −0.95 |
Managing Portfolio Heat
- Set a total heat limit: maximum 3–4% open risk at any time regardless of position count
- Reduce size on correlated pairs: EUR/USD at 1% means GBP/USD long at 0.5% maximum
- Treat highly correlated pairs as partial positions of the same trade
- Apply stricter overnight heat limits due to gap risk
Diversification across correlated pairs is a mirage. Real diversification means managing your exposure to the underlying macro drivers — not just the number of open tickets.