{Beginner} Correlation Coefficient

Yaonology Algorithmic Trading
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Coefficient Correlation

1. What is the Correlation Coefficient?

Correlation coefficients are used in statistics to measure how strong a relationship is between two variables, which in our case is, how strong a relationship is between two stocks.

Correlation coefficient formulas are used to find how strong a relationship is between data. The formulas return a value between -1 and 1, where:

1 indicates a strong positive relationship.

-1 indicates a strong negative relationship.

A result of zero indicates no relationship at all.

{Beginner} Correlation Coefficient

There are several types of correlation coefficient formulas.

One of the most commonly used formulas in stats is Pearson’s correlation coefficient formula.

{Beginner} Correlation Coefficient

2. Tradingview Pine Script

  • Step One: Initial Setting
//Step One: Initial Setting
//@version=4
study("Correlation Coefficient", overlay = false)
  • Step Two: Parameter Setting
//Step Two: Parameter Setting
period = input(title = "period", type=input.integer, defval=240) // Set the number of bars back
ticker = input(title="Symbol", type = input.symbol, defval= "NASDAQ:AAPL") // Get the other stock's name that we want to compare
ticker_price_data = security(ticker, "D", close) // Get the close price of the other stock
cc = correlation(ticker_price_data, close, period) // Calculate Correlation Coefficient
  • Step Three: Plotting
//Step Three: Plot
plot(cc, color = cc > 0 ? color.green : color.red)
hline(0, color = color.gray, linestyle = hline.style_solid, linewidth = 1)
hline(0.75, color = color.gray, linestyle = hline.style_dashed, linewidth = 1)
hline(-0.75, color = color.gray, linestyle = hline.style_dashed, linewidth = 1)

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