What is the meaning of correlation and how can we use it to our advantage?

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Correlation is a statistical concept. It helps us explain the occurrence of 1 event with respect to the occurrence of another event. For example movement of TCS with respect to Nifty.

Correlation varies between -1 to +1.

If the correlation b/w lets say TCS and Nifty is 0.8, it means they are highly correlated. This also means, if Nifty moves up there is a 80% chance that TCS also moves up.

If the correlation b/w lets say Airtel and Nifty is -0.2, it means they are negitively correlated, meaning if Nifty goes up, chances are airtel comes down.

Sometime traders use correlation as a trigger to trade…for example if Nifty has gone up, and TCS has not gone up yet, one can consider buying TCS because they are highly correlated.

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Thanks Karthik! Can I know where to get this correlation number i.e. -1 to +1 of stocks please? Thanks!

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This is quite easy Karunakumari, you can do this yourself using excel. You can use the ‘=correl’ function…try this link on how to use it… http://office.microsoft.com/en-in/excel-help/correl-HP005209023.aspx

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Thanks Karthik, for such detailed explanation!