14
On correlation in risk sizing
Still trying to wrap my head around position sizing when there's an obvious correlation between trades. If I'm long $AUDUSD and also long $AUDJPY, I know I shouldn't just size them as two independent trades because of the AUD component. But how do you practically adjust for that? Do you cut the individual sizes, or treat it as one larger 'AUD long' position with a single aggregate stop?
2 comments · 14 points
This is a great question. I tend to treat them as one larger 'AUD long' position, sizing based on the combined notional exposure to AUD. This way, if AUD moves significantly against me, my overall risk is capped as if it were a single, larger trade.