V.17:7 (298-304): Correlation Among Stocks by Michael P. Turner

V.17:7 (298-304): Correlation Among Stocks by Michael P. Turner
Item# \V17\C07\048CORR.PDF
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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:// www.tradersresource.com.

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.

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