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technical_indicators:correlation_coeffici [2019/09/07 00:14] betseyp [Portfolio Diversification] |
technical_indicators:correlation_coeffici [2023/02/06 15:54] jayanthi |
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| The Correlation Coefficient is a statistical measure that reflects the correlation between two securities. In other words, this statistic tells us how closely one security is related to the other. The Correlation Coefficient is positive when both securities move in the same direction (up or down) and negative when the two securities move in opposite directions. Determining the relationship between two securities is useful for analyzing intermarket relationships, sector-stock relationships and sector-market relationships. This indicator can also help investors diversify by identifying securities with a low or negative correlation to the stock market. | The Correlation Coefficient is a statistical measure that reflects the correlation between two securities. In other words, this statistic tells us how closely one security is related to the other. The Correlation Coefficient is positive when both securities move in the same direction (up or down) and negative when the two securities move in opposite directions. Determining the relationship between two securities is useful for analyzing intermarket relationships, sector-stock relationships and sector-market relationships. This indicator can also help investors diversify by identifying securities with a low or negative correlation to the stock market. | ||
| - | ===== Calculation ===== | + | ===== How Correlation Coefficient Is Calculated ===== |
| The calculation for the Correlation Coefficient is rather complicated, so feel free to skip this section. We will simply look at the basics to see some of the method behind the madness. This indicator is right at the heart of classical statistics. The first step is to select two securities. In this example, we will be using Intel (INTC) and the Nasdaq 100 ETF (QQQ). Namely, we want to see the degree of correlation between Intel and QQQ. The Excel table below lays out the groundwork. | The calculation for the Correlation Coefficient is rather complicated, so feel free to skip this section. We will simply look at the basics to see some of the method behind the madness. This indicator is right at the heart of classical statistics. The first step is to select two securities. In this example, we will be using Intel (INTC) and the Nasdaq 100 ETF (QQQ). Namely, we want to see the degree of correlation between Intel and QQQ. The Excel table below lays out the groundwork. | ||
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| The Correlation Coefficient tells us the relationship between two securities. Over a given time period, the two securities move together when the Correlation Coefficient is positive. Conversely, the two securities move in opposite directions when the Correlation Coefficient is negative. The examples above show 20-day and 50-day Correlation Coefficients. Longer-term investors may use 150 or even 250 days (one year) for smoother lines that reflect longer-term relationships. | The Correlation Coefficient tells us the relationship between two securities. Over a given time period, the two securities move together when the Correlation Coefficient is positive. Conversely, the two securities move in opposite directions when the Correlation Coefficient is negative. The examples above show 20-day and 50-day Correlation Coefficients. Longer-term investors may use 150 or even 250 days (one year) for smoother lines that reflect longer-term relationships. | ||
| - | ===== Using with SharpCharts ===== | + | ===== Correlation Coefficient: How to Find ===== |
| + | ==== Using with SharpCharts ==== | ||
| The Correlation Coefficient is available in SharpCharts under "indicators." First, create a chart with the base security entered in the symbol box at the top of the chart (INTC). Second, select Correlation as an indicator in the drop-down menu. Third, enter the symbol for the other security and the timeframe in the parameters box ($SPX,10). These two are separated by a comma. The example below shows Intel in the main window with the 10-day Correlation Coefficient in the indicator window. This shows how Intel correlates to the S&P 500. Also, notice that the S&P 500 price plot (red dashed) is placed behind the Intel price plot for comparison. [[https://stockcharts.com/h-sc/ui?s=INTC&p=D&b=5&g=0&id=p82568512106|Click here]] for a live chart with the Correlation Coefficient. | The Correlation Coefficient is available in SharpCharts under "indicators." First, create a chart with the base security entered in the symbol box at the top of the chart (INTC). Second, select Correlation as an indicator in the drop-down menu. Third, enter the symbol for the other security and the timeframe in the parameters box ($SPX,10). These two are separated by a comma. The example below shows Intel in the main window with the 10-day Correlation Coefficient in the indicator window. This shows how Intel correlates to the S&P 500. Also, notice that the S&P 500 price plot (red dashed) is placed behind the Intel price plot for comparison. [[https://stockcharts.com/h-sc/ui?s=INTC&p=D&b=5&g=0&id=p82568512106|Click here]] for a live chart with the Correlation Coefficient. | ||