Portfolio & Correlation Management
Most traders don’t blow up because of one bad trade—they blow up because they unknowingly build one giant correlated bet. Portfolio management is the layer that prevents hidden concentration, stabilizes drawdowns, and makes performance reproducible.
1) Portfolio Risk: The Layer Most Traders Skip
Single-trade risk is necessary, but it’s not sufficient. Portfolio risk answers: “What happens if several positions move against me together?”
Total absolute exposure across positions (how “levered” you are overall).
Directional exposure after longs/shorts offset (how biased the portfolio is).
The sum of worst-case losses if all stops are hit (your true portfolio risk).
Minimum professional portfolio checks
- Open risk cap: maximum total risk across all open positions
- Cluster cap: maximum risk within correlated groups
- Directional cap: limit same-direction exposure in one theme
- Drawdown rules: reduce risk or pause under stress
Simple pro language
2) Correlation & Position Clustering
Correlation isn’t constant. During stress regimes, correlations often rise—meaning positions that looked diversified can move together. That’s why pros manage clusters rather than symbols.
EURUSD and GBPUSD can behave like the same trade in risk-on/risk-off moves.
Many assets share the same driver (USD strength, risk sentiment, rates).
Correlation structures can change fast—especially around news and volatility spikes.
| Cluster (theme) | Examples | Risk behavior | Management |
|---|---|---|---|
| USD-driven FX | EURUSD, GBPUSD, AUDUSD | Can move together during USD trends | Cluster cap |
| Risk sentiment | Indices, high-beta FX, crypto | Correlation spikes in sell-offs | Reduce size |
| Rates & USD | USD, Gold, Bonds (proxy) | Factor overlap under macro shifts | Diversify factors |
3) Professional Exposure Caps (Rules That Actually Work)
Caps are how you keep portfolio risk stable when multiple signals trigger at once. Below is a robust ruleset used in professional workflows. Adjust numbers to your strategy, but keep the structure.
Example: max 4R total open risk across all positions.
Core ruleExample: max 2R within any correlated theme (USD cluster, risk-on cluster, etc.).
Stops concentrationExample: limit same-direction exposure (e.g., not 5 USD shorts at once).
Prevents “one bet”Example rule set (copy/paste)
- Risk per trade: 0.25%–1% (strategy dependent)
- Max open risk (portfolio): 4R
- Max open risk (cluster): 2R
- Max daily loss: 2R (hard stop)
- Drawdown rule: reduce risk at -10% DD, pause at -15% DD (example)
Portfolio math (simple)
4) Weekly Portfolio Workflow
Portfolio management should be boring. The goal is repeatability: same process, same rules, every week.
Define risk budget, max open risk, and watch for major macro events that can shift correlations.
Track open risk and clusters in real time. If you add a position, you must still respect caps.
Review drawdown, cluster performance, and rule compliance. Fix process before you fix strategy.
Pro mindset
Your edge is only as good as your ability to deploy it across time. Correlation management keeps you alive during stress—so your edge can compound.
5) FAQ
Do I need a correlation matrix to manage correlation? +
It helps, but you can start with cluster rules (themes/factors). The key is to cap risk in groups that often move together.
Can net exposure be low while risk is high? +
Yes. You can be “market neutral” (low net) but highly exposed (high gross) and vulnerable if correlations break during stress.
What is the simplest portfolio rule that improves survival? +
Cap total open risk and cap cluster risk. This prevents multiple correlated signals from stacking into one oversized bet.
Trading involves significant risk and is not suitable for all investors. Past performance is not indicative of future results. This content is for educational purposes only and does not constitute investment advice. Always verify instrument specifications and your broker’s margin rules.