Definition. A measure of how closely two variables move together. It ranges from −1 (perfectly opposite) to +1 (perfectly in step).
How it works
A correlation close to +1 means that when one value rises, the other usually does too. Close to 0 means no linear relationship. US stock indices are usually strongly positively correlated.
Example
The Dow, the S&P 500 and the Nasdaq usually rise and fall together. Periods when they diverge are interesting information about the market.
What to watch out for
Correlation changes over time and doesn't imply causation.
You'll find the full explanation with graphics, examples and exercises in the 🖥️ Order flow atlas space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).
