Correlation is a measure of how similar a strategies is to each other, in other words how often they conclude and conclude transactions at the same time.
The correlation coefficient takes values from -1 to 1.
The interpretation of the coefficient is as follows:
The coefficient is -1
This is a mirror image of the strategy
The coefficient is 0
No correlation between strategies, perfect condition
The coefficient is 1
The strategies are identical
What values should you look for?
The rule is simple, the closer to 0 the better, for both positive and negative values.
Maximum values should be in the range of -0.4 to 0.4, higher coefficients indicate too similar similarity of the strategy using them in one portfolio will increase the risk of trading.
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