Correlation hedging uses the statistical relationship between two instruments — how closely their prices move together — to offset risk, for example shorting a strongly positively correlated pair alongside a long position to partially neutralize directional exposure. It requires understanding that correlations aren't fixed; they can weaken or even flip, especially during market stress.
Traders holding multiple positions across correlated pairs (like EUR/USD and GBP/USD) without accounting for correlation can unknowingly end up with far more concentrated risk than their position count suggests.
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Guide
What Hedging a Position Actually Costs
Opening the opposite trade freezes the price, not the bill. The spread paid twice, two separate swaps, a margin discount that can be withdrawn, and the decision a hedge only postpones.