Correlations can be used for diversification, risk management and predicting market trends. While correlations are not static, they can provide valuable insight into the relationship between two different assets. Get your notepad ready and dive in!
TIMESTAMPS
00:01 – INTRO
00:37 – UTILITY
> Use asset correlations as a tool in trading.
> Relationships between price movements of two or more assets.
- Positive correlation: assets move in the same direction.
- Negative correlation: assets move in the opposite direction.
> You can use correlations for diversification, risk management, and predicting market trends.
> As a scalp trader, you can utilize correlations to gain added confluence.
> Correlations are particularly helpful during the NY session.
> Correlations hold significance in your risk management.
> Avoiding over-leverage positions is key.
> The importance of diversification.
> The Dollar Index (DXY) is an important barometer for global currencies.
> There is an Inverse Correlation between DXY and S&P 500/Nasdaq.
> These relationships fluctuate in phases.
> DXY does not serve as a reliable predictor of the direction of the S&P 500/Nasdaq.
> Typically, there is a positive correlation between the highest weighted stocks in the S&P 500/Nasdaq.
🔎 04:10 Here we can see the top 10 stocks by their percentage weight in the S&P 500.
🔎 04:58 Here we can see the top 10 stocks by their percentage weight in the Nasdaq 100.
05:34 – IMPLEMENTATION
> You can use the Correlation Coefficient (CC) indicator on TradingView to identify the strength of various correlations.
> It measures the correlation between two sets of data.
- Correlation 0 to 1 = Positive correlation
- Correlation 0 to -1 = Inverse correlation
- Correlation 0 = no correlation
🔎 06:26 Example: Correlation Coefficient tool (TradingView)
> Correlation of Apple and Microsoft to Nasdaq:
- Major components of Nasdaq
- Positive correlation
- Prices usually move in the same direction.
🔎 08:06 Example: Correlation of Apple & Nasdaq
🔎 10:59 Example: Correlation of Apple & Nasdaq for Scalp Trading
> Correlation of Apple and Microsoft to the S&P 500:
- Major components of S&P 500
- Positive correlation
- Prices usually move in the same direction.
> Correlation of DXY to S&P 500 and Nasdaq:
- Inverse correlation
- Fluctuates in phases
- Prices usually move in the opposite direction.
- Not advisable to use this as a leading indicator.
🔎 14:43 Example: Correlation of DXY and S&P 500
🔎 15:41 Example: Correlation of DXY and Nasdaq
> You can use correlations as a leading indicator as long as it is not your only level of confluence.
> These correlations can help you to anticipate short-term price movements.
> Use the correlation as a confirmation tool.
17:48 – TIPS & TRICKS
★ Correlations can change over time and fluctuate.
★ You should monitor and adapt your strategy frequently.
★ You can practice on historical data between two assets.
★ Apply this strategy and theory demonstrated here to any market of interest.
18:47 – FINAL THOUGHTS