Last Updated on 26 October 2022 by automiamo.com

UPDATE! New free indicator of correlations available on Tradingview.

My layout of correlations by giancarlopagliaroli on TradingView.com

Why correlations are useful

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:

1. I want to go short now S&P500. “Green light” from my Strategy A, after backtesting the S&P500
2. 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.

Monitoring pivots

An other importance use case in using correlations is on pivots when assets becoming less correlated as in the following figure

Giancarlo Pagliaroli

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.