What is Correlation?
Quick answer
Correlation measures how closely two assets or strategies move together, from +1 (they move together) to -1 (they move opposite). It matters for diversification: holding things that are highly correlated provides less protection, because they tend to fall together. In copy trading, following leaders with correlated styles concentrates rather than spreads your risk.
Correlation is a way to describe whether two things move in step. It is central to diversification, because spreading across holdings only helps if they do not all move the same way.
What correlation means
Correlation ranges from +1 to -1. A correlation near +1 means two assets tend to rise and fall together; near -1 means they move in opposite directions; near 0 means little relationship. High positive correlation reduces the benefit of holding both, because when one drops, the other likely does too. A key caution: in broad market selloffs, correlations tend to rise, so things that normally diverge can fall together when it matters most.
Why it matters in copy trading
If you follow several leaders who all trade the same way or the same instruments, their results will be highly correlated, so you are concentrating risk rather than spreading it. Genuine diversification across leaders means choosing different styles and instruments whose results do not all move together. Even then, correlation can spike in a downturn, so it reduces concentration risk but does not remove market risk.
Frequently asked questions
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