Correlation
Correlation is the degree to which two instruments move together, on a scale from +1 (lockstep) through 0 (unrelated) to −1 (mirror opposites).
Positively correlated positions held in the same direction are not diversification — they are one larger bet on the shared driver. Long EURUSD and long GBPUSD are both, mostly, a bet against the US dollar; gold and silver, or two stock-index contracts, tell the same story. Correlations also shift over time and tend to strengthen in stressed markets, which is precisely when the stacking hurts most.
The practical defense is to measure risk per theme, not per ticker. If three open trades each risk 1% and all lean on the same driver, treat the book as a single position risking about 3% and size accordingly (see position sizing). Correlated positions in opposite directions do the reverse — they offset, forming an accidental hedge that mutes both trades.
Example
On a $100,000 account you risk 1% per trade: long EURUSD with $1,000 at risk and long GBPUSD with another $1,000. A broad dollar rally takes out both stops the same morning: −$2,000, a 2% hit from what felt like two independent ideas. The account just took the drawdown of a single double-sized trade that was never deliberately planned.
In a prop-firm challenge
The daily loss limit is measured across all positions, and correlated stop-outs land together. In the example above, one dollar move consumed $2,000 of a $5,000 (5%) daily budget in a stroke; three stacked pairs would have taken more than half. A simple challenge rule of thumb: cap combined risk per currency or theme at whatever you would risk on one trade, and count a cluster of correlated setups as one signal, not several confirmations of each other.