The illusion of diversification
Opening two positions on two instruments looks like diversification, and is not if the instruments move together. Gold and silver rise and fall together in most conditions, so buying both at 1% risk each is effectively a 2% risk in one direction.
More dangerously, correlation is not stable: it can be low in ordinary conditions then jump toward +1 under severe stress — precisely the moment you were counting on diversification. So exposure is computed on the worst assumption rather than the historical average.
Written risk versus exposed risk
This family uses the same reference account: $1,000 risking 1%, or $10 a trade. The shared idea is that real risk is not what you wrote on a single trade but what is actually exposed when the market moves.
Two correlated positions at 1% each are not 2% spread across two trades; they may be a single 2% risk. Measuring that difference is what these pages do.
A worked example
On the reference account, three buys at 1% risk each: gold, silver and EUR/USD. Written risk is 3%, or $30.
But all three move against the dollar. When the dollar firms on a single release, all three lose together: $30 on one event, not three independent risks. You did not open three trades but one trade against the dollar at triple size — which is exactly what makes risk of ruin far higher than the written risk log suggests.
Common mistakes with this term
- Treating multiple instruments as diversification without checking correlation, silently multiplying real risk.
- Relying on a low historical correlation, when it jumps toward +1 under stress.