Correlation Coefficient - MetaTrader 5 Script | Trading Script Download - MT4/MT5 Resources - MetaTrader 5 Resources

Correlation coefficient (CC) is used in statistics to measure the correlation between two sets of data. In the trading world, the data set can be any financial instrument. Simply put, the correlation between two financial instruments is how correlated they are. Correlation is based on a range of 1 to -1. The closer the correlation coefficient is to 1, the higher the positive correlation between the two instruments and will move up and down simultaneously. The closer the correlation is to -1, the stronger the instrument moves in the opposite direction. A value of 0 indicates no correlation.

The indicator value fluctuates between positive and negative correlation, indicating how synchronized the price movements of the two instruments are. A correlation coefficient of +1 is a perfect positive correlation, and prices move in perfect sync. A correlation coefficient of -1 indicates a perfect negative correlation, that is, the price movements are completely opposite. Both extremes are rare, and the correlation coefficient usually fluctuates between maximum values. A correlation coefficient of 0 is the midpoint, indicating that there is no correlation between the two instruments.

Correlation coefficient between EURUSD and USDCAD:

USDCAD chart superimposed on EURUSD chart and its correlation coefficient:

Unlike many technical analysis indicators, the correlation coefficient is ideal for long-term investing. Correlation coefficients can be very useful if investors want to build a truly diversified portfolio. It can help determine how different the assets in a portfolio are from each other. In other words, by using less relevant tools, you avoid the risk of unnecessary duplication.

The indicator has three customizable parameters:

As mentioned earlier, the correlation coefficient can be a useful tool when compiling a diversified portfolio. However, one thing to always keep in mind is that the correlation between two tools can and does change from time to time. This indicator will help traders understand such changes and adjust their investments accordingly.

Attachment download

📎 correlationcoefficient.mq5 (5.79 KB)

Source: MQL5 #49182