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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.

1. The value of r lies between −1 and 1, inclusive.

2. The sign of r indicates the direction of the linear relationship between x and y:

1. If r<0r<0 then y tends to decrease as x is increased.

2. If r>0r>0 then y tends to increase as x is increased.

3. The size of |r| indicates the strength of the linear relationship between x and y:

1. 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.

2. 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.

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