Sizing each position in isolation is the most common way traders blow through their real risk tolerance without noticing. The fix is a position sizing formula plus a correlation adjustment that treats related positions as one combined risk block.
1. The base position sizing formula
Position size in lots = (Account Balance x Risk Percent) / (Stop Distance in Pips x Pip Value per Lot). For a $10,000 account risking 1% ($100) on XAU/USD with a 300-pip stop (equivalent to a $3.00 move at standard pip definitions many brokers use for gold) and a pip value of $1 per 0.01 lot, the position size works out to roughly 0.33 lots.
The critical detail is that pip value is instrument-specific: a $10 pip value assumption borrowed from EUR/USD calculations will misprice a gold or silver position by a wide margin, since XAU/USD and XAG/USD use different contract sizes and tick values than currency pairs.
2. Why correlated instruments compound risk
Gold and silver typically move together with a rolling 20-day correlation between 0.6 and 0.85. If you size a XAU/USD trade at 1% risk and a XAG/USD trade at 1% risk independently, believing you have 2% total risk, the real effective risk is closer to 1.6-1.85% because the two positions tend to win or lose together rather than diversifying each other.
The same applies to commodity-linked FX pairs. AUD/USD often tracks broader risk sentiment and commodity demand, and USD/CAD is sensitive to oil, both of which can move in sympathy with a gold position during a broad dollar or risk-sentiment shift.
3. Building a correlation-adjusted risk budget
- Group positions: Any two instruments with a rolling correlation above 0.5 (positive or negative) get treated as one combined risk group rather than separate line items.
- Cap the group: Set a maximum combined risk ceiling for each group, commonly 3% of account equity, regardless of how many individual positions make it up.
- Scale down individually: If you already hold a 1.5% risk gold position and want to add silver, reduce the silver allocation so the combined group risk still respects the 3% ceiling rather than adding a full fresh 1-2%.
4. A worked example
Suppose your correlation cap for the gold-silver group is 3%. You open XAU/USD at 1.75% risk. Your remaining budget for XAG/USD in that same group is only 1.25%, not the full 2% you might otherwise use on an uncorrelated trade. Recalculate the silver lot size using that reduced 1.25% figure in the base formula above.
