CorrelationAmong Stocks by Michael P. Turner
If you are trading stocks, you may find opportunities by
tracking the correlation between them. This can lead to
different strategies such as trading one company off of
anotherís news, spread trading, and sector trading. The
techniques described here were adapted from the book Day
Trading Into The Millennium, available from http://
In todayís financial markets, a relationship,
or correlation, exists
among all securities. Sometimes
there is a positive correlation,
sometimes there is a negative
correlation, and sometimes
there is no correlation whatsoever.
Statisticians have a way to
measure the relationship between
two data series. This statistic is
called the correlation coefficient.
A correlation coefficient is described by a range that spans
from -1 to 1. Securities that are positively correlated will
move in tandem with one another and have a correlation
coefficient value near or at 1. Stocks that are negatively
correlated will move opposite one another and will have a
correlation coefficient near or at -1.