Sid Hopps

Apr 20, 2023

Simple linear correlation is a measure of the degree to which two variables vary together, or a measure of the intensity of the association between two variables.

Simple linear correlation is a measure of the degree to which two variables vary together, or a measure of the intensity of the association between two variables.

The value of

*r*lies between −1 and 1, inclusive.The sign of

*r*indicates the direction of the linear relationship between*x*and*y*:If r<0r<0 then

*y*tends to decrease as*x*is increased.If r>0r>0 then

*y*tends to increase as*x*is increased.

The size of |

*r*| indicates the strength of the linear relationship between*x*and*y*:If |

*r*| is near 1 (that is, if*r*is near either 1 or −1) then the linear relationship between*x*and*y*is strong.If |

*r*| is near 0 (that is, if*r*is near 0 and of either sign) then the linear relationship between*x*and*y*is weak.

Key Takeaways:

The linear correlation coefficient measures the strength and direction of the linear relationship between two variables

*x*and*y*.The sign of the linear correlation coefficient indicates the direction of the linear relationship between

*x*and*y*.When

*r*is near 1 or −1 the linear relationship is strong; when it is near 0 the linear relationship is weak.

We attempt to capture trends with high positive R values (long only trades) and ride the trends until the correlation coefficient begins to deteriorate.