Stocks & Commodities V. 35:02 (14–16, 18, 27): Using Correlation To Trade The S&P 500 by Cassandra Wang

Using Correlation To Trade The S&P 500 by Cassandra Wang

Do you want to trade assets that are positively correlated or are you better off trading assets that move in different ways? Here’s a look at how a correlation strategy compares with a moving average crossover strategy and a buy & hold strategy.

When you think of the term correlation, you think of it as a relationship between two distinct variables. A strong positive correlation means two variables move together; a strong negative correlation means the two variables move in opposite directions. So if you know how well two assets are correlated, you could infer the patterns of a variable. In the financial markets, when the movement of one asset corresponds to the movements of other assets, this results in inter-asset correlation ...