The fastest way to double your risk without noticing is to open a second position "in another market" that is really the same one. A long in ES and another in NQ on the same day diversify nothing: when the index drops 1%, both drop. This guide explains what a correlation measures, why it has to be read through two different lenses and what it means for the daily limit and the drawdown of a prop firm account.
What a correlation measures
A correlation coefficient runs from −1 to +1. At +1, when one rises the other always rises; at −1, when one rises the other always falls; at 0, there is no relationship. In between, the number says how consistently they move in the same direction: 0.9 is almost always together, 0.3 is sometimes, −0.5 is more often opposite than together.
Two nuances that get forgotten: correlation speaks about direction, not magnitude (two markets at 0.95 can move 1% and 2% on the same day), and it is computed over a specific time window, so the same pair can read 0.9 over three months and 0.4 over two weeks.
Two lenses: daily returns and price levels
There are two ways to compute it that answer different questions, and it pays to have both:
| Daily-return correlation | Price-level similarity | |
|---|---|---|
| What it compares | Each day's percentage change | The shape of the price curve over the window |
| Which question it answers | Do they move together today? (risk) | Are they in the same regime? (trend) |
| When it misleads | Ignores that one can be trending while the other ranges | Two trending series look correlated even if their daily moves are unrelated |
| What it is for | Sizing simultaneous positions | Choosing which market has the cleaner move |
A pair can be highly correlated in returns and drift apart in levels: ES and RTY rise and fall together almost every day, yet for months one can make new highs while the other stays in a range. For the day's risk the first lens matters; for deciding which of the two to trade the trend in, the second.
US index futures move together
ES, NQ, YM and RTY share the same flows, the same news and a good part of the same companies. Their daily-return correlation is structurally very high: it is not this week's number, it is the nature of the four contracts. What changes with the regime is the degree (in panics it approaches 1; in calm markets NQ and RTY can decouple somewhat) and, above all, the relative volatility: NQ usually moves more than ES in percentage terms, and RTY more than YM. Check the current value, but do not expect surprises in the sign.
Practical consequence: for an intraday trader, choosing between ES, NQ, YM and RTY is choosing volatility and tick value, not diversification. Trading two at once in the same direction is one position with two tickets.
Other relationships worth knowing
Outside the indexes, relationships depend on the regime and must be read with the window in front of you, not from memory. Qualitatively:
- Bonds and indexes (ZN, ZB versus ES): in a risk-on / risk-off regime they move opposite; in an inflation regime they can fall together. The sign changes, and when it does it is usually news.
- Dollar and currencies (DX versus 6E): the euro is the largest component of the dollar index, so the inverse relationship is almost mechanical.
- Energy (CL, RB, HO): crude and its products move together most of the time, with divergences from refining margins and seasonality.
- Gold (GC): responds to real rates and the dollar; its correlation with indexes is unstable and it is a bad idea to count on it as a hedge on any given day.
In a prop firm, two correlated positions are one at double size
The daily limit and the trailing drawdown know nothing about correlations: they only see the sum. Suppose, with illustrative levels, that ES trades around 6,000 and NQ around 21,000, and you are long one contract of each. A 1% drop in the index:
| Position | 1% drop | Loss |
|---|---|---|
| 1 ES long | 60 points × $50 | −$3,000 |
| 1 NQ long | 210 points × $20 | −$4,200 |
| Both at once | −$7,200 | |
| 1 MES + 1 MNQ | the same in micros | −$720 |
With a $1,000 daily loss limit (Topstep 50K, September 2026 reference value), the pair of minis exceeds the limit seven times over in a perfectly normal move; the pair of micros eats almost all of it. And under intraday trailing, if the index rose 0.5% before falling, the threshold already moved with the floating profit of both positions. The guide to trailing drawdown explains that mechanism; the one on position sizing, how to split one risk between two tickets.
The window changes the answer
A 20-day correlation captures what is happening now and is noisy: four odd sessions move it by tenths. A 250-day one is stable and hides regime changes: it can read 0.2 between bonds and indexes while they have spent a month at −0.6. Neither is "the right one". The useful practice is to look at both and act when they disagree: if the short one drifts far from the long one, something changed in the market and your simultaneous positions no longer behave like your history says.
Practical uses and a checklist before the second position
- Do not stack: if two markets have a high return correlation, the second position comes out of the same R as the first.
- Pick the better vehicle: between two correlated markets, trade the more liquid one, the cheaper one per unit of exposure or the one with the cleaner structure under the levels lens.
- Distrust hedges: a "hedging" short in the correlated market pays two commissions and exposes you to the spread; closing half is cheaper and safer.
- Tag it in the journal: mark simultaneous trades in correlated markets and look at their combined result in R, not each one alone.
Before opening the second position, three questions:
- Is the return correlation between the two markets, over the short window, above 0.7? Then it is one position.
- Does the sum of both risks fit my plan's R and what is left of my daily limit?
- Is the reason for the second entry different from the first? If not, do not open it: raise the size of the first if the plan allows, or do nothing.
Frequently asked questions
Does a 0.9 correlation mean they move the same?
It means their daily returns go up and down together almost always, not that they do so by the same amount. NQ usually moves more than ES in percentage terms even when the correlation is very high. For risk, both things matter: direction (correlation) and the size of the move (volatility).
Can I use correlation for hedging?
With care. Hedging an ES long with an NQ short reduces directional exposure, but it pays commissions on both legs, requires the relationship to hold and leaves you exposed to the spread between the two, which is exactly the hardest thing to predict. For most prop firm accounts, closing half is a better hedge than opening an opposite position.
How often do correlations change?
Structural ones (ES with NQ, ES with YM) are stable for years; regime ones (bonds with indexes, gold with real rates) can flip sign in weeks. That is why it pays to look at two windows: a short one for what is happening now and a long one for what normally happens.
Next step
Go through your journal and mark the days you had two positions open in correlated markets: add up their result in R and compare it with your plan's R. If the sum exceeds the plan regularly, the risk ladder tells you what it should be, and the position size calculator how to split it between two contracts.