Last Updated on 3 August 2022 by automiamo.com
I always monitor correlations before doing day trading or swing trading on more assets, at the same time.
Correlation is a measure that defines how different assets move in relation to one another. The more the correlation coefficient is, the more they are aligned closely.
I have created a dashboard on Tradingview to do this.
I monitor correlation on monthly, weekly, daily timeframes. An example use case below:
- I want to go short now S&P500. “Green light” from my Strategy A, after backtesting the S&P500
- I want to go short now BTCUSD. “Green light” from my Strategy B, after backtesting the BTCUSD
Monthly correlation between S&P500 and BTCUSD (using 1-D chart and correlation length = 20) is 95%
Weekly correlation between S&P500 and BTCUSD (using 1-D chart and correlation length = 5) is 98%
Weekly correlation between S&P500 and BTCUSD (using 30-minutes chart and correlation length = 240) is 65%
Daily correlation between S&P500 and BTCUSD (using 30-minutes chart and correlation length = 48) is 69%
Correlation between these two assets is too high, will move in tandem, so preferring of going short one asset, not both. Furthermore, each strategy is not perfect and if I lose one trade I can lose twice. I go short only one asset on which I am more confident with my strategy and odds.
I would like to learn how you monitor correlations in your trading. Please let me know.
Disclaimer: The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by me.