What Is Correlation?

In trading, correlation is a measurement of the relationship between two assets.

Understanding Correlation

A positive correlation suggests that Asset B will move in the same direction as Asset A.

For example, the German stock market (DAX) and EUR/JPY moved in the same direction from 2004 to 2010. That is, EUR/JPY rose when DAX performed well and plummeted when the stock market dropped.

A negative correlation suggests that Security B will move in the opposite direction of Security A.

An example is a correlation between EUR/USD and the dollar index (USDX). A strong dollar would usually lift USDX, but it will also boost the dollar against the euro, resulting in downward price action for EUR/USD.