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Correlation Analysis

Correlation Analysis compares a stock to any indicator or another stock and demonstrates how like or dislike they are to one another. One can use correlation analysis in two main ways - for defining connection between two securities and for defining the ability of an indicator to forecast the situation on the market.

The comparison of the correlation between an indicator and a security's price provides you with useful information. A high negative correlation (below -0.70) shows that when the indicator changes, the security's price as a rule moves in the opposite direction. A high positive coefficient (over +0.70) demonstrates that the indicator change as a rule forecasts a change in the security's price. A low (close to or equal to zero) coefficient demonstrates that the connection between the security's price and the indicator is not so important.

In addition, correlation analysis is useful for measuring the connection between two securities. As it often happens that one security's price causes or forecasts the price of another security. For instance, the correlation coefficient of gold against the dollar demonstrates a strong negative relationship. Thus, the dollar increase as a rule forecasts a decrease in the gold's price.