What is Correlation Trading?

Correlation trading is a type of trading strategy that involves trading based on the relationships between two similar securities. Basically, an investor will watch the performance of one security, and then will place a trade with a security that is highly correlated to it.

Correlation Types

There are many different types of investments that can be highly correlated. For example, gold and silver are highly correlated and tend to mirror each other when they move. Currency pairs in the Forex market are another example of something that can be highly correlated. For example, pairs that have a common currency in them tend to be very highly correlated. When the GBP/JPY pair moves, the EUR/JPY pair also tends to move in the same direction. 

Word of Caution

Be careful because securities do not always move in unison. Sometimes, they will go in opposite directions. If two securities are truly correlated, they will move together in the same general direction most of the time. If you do your homework and find some securities that are truly correlated, you can watch them, place your trades and make some steady returns in the process.

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