Who this is for — Traders combining multiple strategies who need to know whether they are truly independent. Essential to prevent one logic's drawdown from dragging down the entire portfolio.
In plain terms — If two systems gain and lose almost always together, correlation between them is high and real diversification is low.
Prerequisites — Complete first silver-path (min.: position-sizing, trading-plan, drawdown, diversification). Foundation: bronze-path.
How to assess it in practice
Correlation should be calculated on rolling windows because it changes with regime. Strategies with different signals can suddenly align during stress phases. For this reason it helps to distinguish average correlation, correlation spikes, and tail behaviour. The concept extends correlation from the asset level to the system level.
Example — Two systems, one breakout and one momentum, seem independent for months. In a strong directional trend they start taking similar positions and correlation rises above 0.8.
Impact on weight allocation
When correlation rises, weights should be rebalanced or offset with different strategies. Ignoring this dynamic leads to underestimating overall portfolio risk. High correlation is not always a problem, but it requires awareness and coherent limits. In the portfolio module it is a key input for capital-allocation and aggregate-risk.
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- What it is: degree of synchronisation between equity curves of different systems.
- How to use it: adjust weights and limits when systems converge.
- Typical mistake: estimating it once and treating it as stable.
Gold path — Module: Portfolio and allocation. Part of gold-path.