Why it matters
If you assume stable correlations, you will under-estimate portfolio drawdowns. Breakdown is how diversification turns into a single bet.
Trading use: the point is not vocabulary. The point is prediction: what changes when this shows up?
Common trap
Relying on recent correlation estimates as if they were laws.
Example
Pairs that were uncorrelated in calm markets move together during a funding shock.
Operational cue: if you can’t point to it on the chart, in the DOM, or in your broker logs, treat it as a story and trade smaller.
Notes
Quick rule
- If you see this repeatedly, you are in a different regime than your model assumes.
- Regime change usually means position size change.
- When in doubt: trade smaller, or don’t trade.