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How The Stock Correlation Affects Trading

April 17, 2012 | Comments: 0 | Views: 94

Stock trading is one of the trickiest investments and any person should be careful enough when on it. This is because the trading is normally done during the day and things can change within minutes. One should therefore be very much informed of the stocks that one wished to trade in. When doing this, one should use timing as the best trading strategy. One should know when to trade off a give stock and when to ride on the other.

In stock trading, there are three things that are involved in the business. The first one is making a profit. One can make major profits on all the stocks he/she is trading in on a perfect day. One can also make straight losses in all the stocks that one trades in. In other days, one can have mixed results during the trading day. Management of the stocks is key if one is to survive the ups and downs of stock trading. This can be achieved by avoiding extreme results, especially when it comes to downward trend. One can ensure this by making sure that there is a possibility of mixed results with the most of the stocks leaning towards making a profit.

How can one measure this? This is a good question. There is a trading concept that is known in technical terms as the stock correlation. To understand the importance of stock correlation, an investor should first of all understand how the concept works. On the correlation scale, there will be a probability of a stock moving in the same direction should the trading resume, if the stock in comparison have a correlation value of one. When they have a correlation value of zero, then one cannot have fore knowledge on how the stock will trade in relation to each other. This is effect means that the trader will only has to monitor each stock separately. When the selected stocks have a value of negative zero, it means that with every movement, the two stocks might move in the opposite direction with equal measure. When one has a correlation value of negative one, there are chances that the loss might be taken care of by the gains made by the other. This is a more balanced trade depending on the strategy. Every trader should make sure that he/she understands how correlation value affects trading. This is to avert possible loss and strategize on how to make the profits.

Visit stock correlation and forex correlation online tools for more information on trading.

Source: EzineArticles
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