As an investor, my goal is to earn as much money as possible with the principle investment dollars I have. With that said, I’m constantly on the hunt for ways to maximize my earnings. One of my favorite strategies for doing so is called the correlation strategy. This strategy recognizes the fact that some assets are correlated; and that by trading them together, the investor has the ability to earn more from the trends they find. Today, we’ll talk about what the correlation strategy is and how it works as well as go over a few examples of correlation in the market. So, let’s get right to it.

## What Is The Correlation Strategy?

The correlation trading strategy is designed to take advantage of the fact that many assets are correlated. Therefore, if the trader knows a big event is going to happen that’s likely to cause movement in one asset, he also knows that the event is likely to cause movement in correlated assets; leading to more opportunities. There are two different types of correlation in the market…

**Positive Correlation –**A positive correlation is when two or more assets tend to move in tandem with each other in the market. Therefore, when one asset moves up, any positively correlated asset is likely to do the same. Adversely, when an asset sees declines, positively correlated assets are likely to follow the value down.**Negative Correlation –**Negative correlation is the exact opposite of positive correlation. Assets that are negatively correlated tend to see opposite movements in the market. Therefore, when an asset sees increases, negatively correlated assets will trend to decline. Adversely, when an asset sees declines, negatively correlated assets are likely to trend up.

## Examples Of Positive And Negative Correlations In The Market

**Positively Correlated Assets –** As mentioned above, positively correlated assets tend to move in tandem with each other. Therefore, one of the best examples of this phenomenon would be the relationship of commodities with commodity producing stocks. For example, take a look at Gold in comparison to Goldcorp in the chart below…

Looking at this chart, it’s clear to see that when the value of gold sees improvements, as it did from 2005 to 2008, so too does Goldcorp stock. Adversely, when the value of gold declines, the value of Goldcorp falls as well. Therefore, knowing this information allows the trader to execute two trades at a time; effectively doubling earnings.

**Negatively Correlated Assets –** As mentioned above, negatively correlated assets move against one another. Therefore, when the value of one is trending up, the value of the other tends to trend down. A perfect example of this would be the relationship between the United States dollar and silver. This negative correlation is easy to see by looking at the chart below…

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