Guide · Markets
What Is Correlation in Trading? Why Your "Diversified" Portfolio Might Not Be
Two assets can look completely unrelated and still move in lockstep. Understanding correlation is what separates real diversification from just holding more things.
Correlation measures how closely two assets move in relation to each other, on a scale from -1 to +1. A correlation near +1 means they tend to rise and fall together; near -1 means they tend to move in opposite directions; near 0 means their movements are essentially unrelated. It's a statistical measure, not a guarantee — correlations describe a historical tendency, and that tendency can shift.
The practical reason it matters is diversification. Holding five different stocks feels diversified, but if all five are highly correlated tech names that tend to rise and fall together on the same macro news, the portfolio behaves a lot like holding one large position — the appearance of diversification without much of the actual risk reduction. Real diversification means holding assets with low or negative correlation, so a bad day for one doesn't automatically mean a bad day for all of them.
Correlation also isn't fixed — it can strengthen or weaken depending on market conditions. Assets that normally move independently often become far more correlated during a broad market panic, when investors sell everything indiscriminately regardless of an asset's individual fundamentals — a phenomenon sometimes summarized as "in a crash, correlations go to 1." That's exactly when diversification is needed most and tends to work least.
Trade2Spike's Multi-Asset watchlist makes correlation visible in practice: watching how crypto, stocks, forex, and commodities move relative to each other on the same day is a faster way to build an intuition for which assets actually move together than reading a definition of the concept.