Stock Market Glossary
Correlation
Statistical measure of the joint development of two assets.
In brief: Statistical measure of the joint development of two assets.
Meaning in practice
A correlation of +1 means complete synchronization, -1 complete opposite direction, 0 means no linear relationship. Low-correlated assets are the foundation of any true diversification – but correlations are not stable and increase in crises.
Context for investors and traders
For traders, this term is most useful when preparing and executing an order. Its meaning depends on the venue, liquidity, time frame and order type. A single reading is not a reliable buy or sell decision.
How to use this in practice
In practice, the term should be linked to a specific trading plan: entry, exit, position size and costs belong together. In short time frames, spread, slippage and delayed execution can quickly outweigh the theoretical benefit of an observation.
What to keep in mind
Write down which observation confirms or invalidates your assumption before trading. This keeps the term a decision-making tool rather than a retrospective justification for risk already taken.
