I Spread Across Several Instruments, So Why Do They Lose Together? > Learning materials

It is easy to think that spreading across different instruments diversifies your risk. But if those instruments are tied to the same market factor, what you have actually done is no different from placing one large bet in a single direction.

Look at Factors, Not Names

Indices, technology stocks, commodities, and emerging market currencies carry different names, but there are stretches where they react together to the common factors of interest rates, the dollar, and risk appetite. In those stretches, even spreading across four positions leaves you losing on all of them on the same day. Count how much your whole account is exposed to each factor on a factor basis, not by instrument name.

Correlation Is Not a Fixed Value

Assets that normally move separately often move together during sharp sell-offs. If you take comfort in the fact that past correlation was low, the diversification effect disappears at the very moment you need it most. It is safer to set your total exposure limit on a factor basis.

Verification Checklist

• When you group your open positions by factor, are they concentrated on one side?
• Have you set a total exposure limit per factor?
• Have you accounted for correlation rising during sharp market moves?
• Have you calculated the combined loss if the worst case hits all of them at once?

This article is community learning material and is not investment advice, a personal recommendation, or a solicitation to trade. Leveraged products can produce large losses in a short period of time, and actual product terms and costs must be checked directly in the official documents and your account screen at the time of use.