You sized every position carefully. Each one risks a small, sensible fraction of the account. And yet a single bad afternoon takes a chunk out of all of them at once. The math on each trade was fine; the problem was that the trades were not independent. Correlation across crypto pairs is the risk that turns several careful bets into one large, hidden one — and it is invisible if you only look at positions one at a time.
What correlation means here
Two pairs are correlated when they tend to move together. In crypto this is common: many pairs take their direction from Bitcoin, so when it falls hard, a long list of altcoin positions falls with it. Holding five such positions is not five independent bets on five outcomes — it is closer to one large bet on the same outcome, dressed up as diversification.
Why per-trade sizing is not enough
Per-trade risk limits assume each trade can be judged on its own. Correlation breaks that assumption. If each of five correlated positions risks a small fraction, a move that hits all five at once risks the sum of those fractions in a single stroke. Your real exposure to that one move is far larger than any individual position suggests, and your per-trade limit never saw it coming.
Sizing for the move that hits them all
The discipline is to size as if correlated positions are one position when it comes to the worst case. If several pairs would all fall together, the combined risk of that scenario should fit inside your limits, not just each trade's slice of it. In practice that means fewer simultaneous positions in the same direction on highly correlated pairs, or smaller sizes on each so the cluster stays survivable.
Correlation is not constant
A further trap: correlations rise in a crisis. Pairs that drift apart in calm conditions often crash together when fear takes over, exactly when you most need the diversification you thought you had. A prudent policy assumes correlation will tighten under stress rather than hoping it holds loose.
Correlation risk is why fixed-fractional sizing alone is not a full policy, and why the limits you set belong in a written risk policy agreed in calm. Counting positions is easy; counting the bets behind them is the discipline.