When trading multiple currency pairings in your trading account at the same time, always be conscious of your RISK EXPOSURE.
For example, because they normally have a positive correlation, trading AUD/USD and NZD/USD is virtually the same as having two identical trades open.
You may feel that trading in different pairs spreads or diversifies your risk, however many pairings tend to move in the same way.
So, instead of lowering danger, you are increasing it! Unknowingly, you are putting yourself at greater risk.
This is referred to as overexposure.
Consider the following example, which involves two strongly linked pairings over a one-week period: the EUR/USD and the GBP/USD.
| EUR/USD | USD/JPY | USD/CHF | GBP/USD | USD/CAD | AUD/USD | NZD/USD | EUR/JPY | EUR/GBP |
|---|---|---|---|---|---|---|---|---|
| 1 week | -0.23 | -1.00 | 0.94 | -0.98 | 0.98 | 0.93 | 0.93 | 0.86 |
| 1 month | 0.63 | -0.98 | 0.13 | -0.90 | 0.90 | 0.96 | 0.91 | 0.86 |
| 3 months | -0.62 | -0.92 | 0.83 | 0.14 | 0.63 | 0.42 | 0.61 | 0.75 |
| 6 months | -0.62 | -0.85 | 0.31 | -0.35 | 0.61 | 0.65 | 0.28 | 0.71 |
| 1 year | -0.69 | -0.98 | 0.88 | -0.93 | 0.95 | 0.96 | 0.66 | 0.02 |
Currency Correlation Example #1: EUR/USD and GBP/USD
To prove to you that the numbers don’t lie, here are their 4-hour charts. Notice how they both moved in the same direction…down.
Returning to the question of risk, starting a position in both the EUR/USD and the GBP/USD is equivalent to doubling up on a position.
For example, if you buy one lot of EUR/USD and one lot of GBP/USD, you’re essentially buying two lots of EUR/USD because both the EUR/USD and the GBP/USD will move in the same direction anyway.
In other words, you are RISKING MORE. You don’t have two opportunities to be wrong when you buy EUR/USD and GBP/USD!
You only have one shot since if EUR/USD falls and you are stopped out, GBP/USD will very certainly fall and stop you out as well (or vice versa).
You also wouldn’t want to buy EUR/USD and sell GBP/USD at the same time since if EUR/USD skyrockets, GBP/USD will most likely skyrocket as well, leaving you in a bind.
If you believe that your profit or loss will always be zero, you are mistaken. EUR/USD and GBP/USD have different pip values, and just though they are highly connected does not mean they move in the same exact pip range all of the time.
