Correlation summarizes how two return series move together over a window. High positive correlation between two positions can mean you are effectively doubling exposure to similar macro shocks.
Correlation is not stable forever
Windows and regimes change. A pair that moved together for months can diverge on a policy surprise.
Heatmaps as a sanity check
Heatmaps compress many estimates into one view so you can ask: “Am I diversified or stacked?”
Open the correlation heatmap alongside your watchlist.
Reading correlation as a risk dial
High positive correlation between two open positions means a single shock can move both the same way. Think of correlation as a portfolio overlap meter, not a timing signal.
Windows and stability
Correlation estimates depend on the lookback window. Short windows react fast; long windows smooth noise but hide fresh regime breaks.
- Compare 20-day vs 60-day views occasionally.
- Flag regime shifts after major policy surprises.
- Down-weight stale correlation during crisis weeks.
Actionable response
When overlap is high, the first lever is usually size: keep the better setup, cut the redundant one, or split risk explicitly between them.