Risk and Capital
A trader shows me a screen with six open positions and says the book is diversified. Long EUR/USD, long GBP/USD, long AUD/USD, short USD/CHF, short USD/JPY, long gold. That is not six trades. That is one short dollar position with six different fee structures.
Currency pairs share a leg
Every FX pair contains two exposures. If the same currency appears on the same side of several positions, those positions move together by construction. The correlation is not a statistical curiosity that might fade; it is arithmetic.
| Position | Long | Short | Dollar exposure |
|---|---|---|---|
| Long EUR/USD | EUR | USD | Short USD |
| Long GBP/USD | GBP | USD | Short USD |
| Short USD/CHF | CHF | USD | Short USD |
| Long XAU/USD | Gold | USD | Short USD |
Four positions, one bet. A hawkish surprise from the Federal Reserve hits all four within the same second, and the account takes four times the loss it budgeted for one.
Three layers of correlation worth tracking
01
Shared currency
The mechanical layer. Count exposure per currency, not per pair, and cap it.
02
Shared driver
Commodity blocs, risk-on and risk-off, regional central bank cycles. Different currencies, one catalyst.
03
Shared setup
Six trades from the same pattern in the same session are one bet on that pattern working today.
The third layer is the one traders miss most often, because the positions look unrelated on the currency matrix. If every trade came from the same breakout trigger at the London open, they will fail together on the day that trigger stops working.
A simple exposure sheet
You do not need software. A column per currency and a row per open position is enough. Add the risk in each cell with the correct sign and read the totals.
- 1List open positions and the currency risk they imply.
- 2Net the exposure per currency in account terms.
- 3Apply a cap: no more than 1.5 per cent of equity net-long or net-short any one currency.
- 4Recheck before every new entry, not at the end of the day.
What to do when the sheet says you are over
Reduce the weakest expression of the same idea rather than closing the strongest. If four positions all express short dollar, keep the one with the cleanest technical structure and the tightest invalidation, and cut the rest to fit under the cap. The bet survives; the concentration does not.
Diversification is not owning more instruments. It is owning exposures that can disappoint you on different days.
Written by Adrian Vestberg — former interbank FX dealer, now running a two-person discretionary desk.