In the world of finance, correlation is a statistical measure of how two securities move in relation to each other.
Correlation is represented by the "correlation coefficient", which ranges between 1 and +1.
When the prices of two securities usually move in a similar direction, the securities are considered "correlated."Â The amount of correlation ranges from 0, which means no correlation, to 1, which means perfect correlation. Perfect correlation means the relationship that appears to exist between two securities is positive 100% of the time.
For example, if the price of oil related stocks increases while gas related stocks tend to increase as well, they are considered to have a positiveÂ correlation. The more predictably they do this, the closer the correlation coefficient is toÂ +1.Â
On the other extreme, when the prices of two securities consistently move inÂ oppositeÂ directions, they areÂ negativelyÂ correlated. This is measured from 0 to 1, where zero is no correlation, and negative 1 is perfect negative correlation.Â A perfect negative correlation means that the relationship between two securities is opposite 100% of the time.
For example, if the price of small cap stocks increases while government bonds tend to decrease, they have aÂ negativeÂ correlation. The more predictably they do this, the closer the correlation coefficient is to 1.
"Nocorrelation" securities move independently of each other, with no apparent relationship.Â If the price of oil related stocks and medical related stocks move independently of each other, they have 0 (or no) correlation.
Nocorrelation is important for portfolioÂ diversification. When some securities in a portfolio are losing money, other noncorrelated securities will likely still be gaining or not moving at all, reducing the investor's losses.
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In This Series

Financial Advisor
4 Reasons Why Market Correlation Matters
Learn about how correlation can be used to measure how broader markets move in relation to each other. See how correlation is used to manage risk. 
Investing
Understanding the Oil & Gas Price Correlation
Learn how the correlation between the commodity prices for natural gas and oil changed from 2004 to 2015 due to increased natural gas production. 
Investing
Is the Stock Correlation Strategy Effective?
The synchronized movement among stocks and markets in recent years is challenging diversification. 
Insights
Prices of Stocks and Bonds Move More in Tandem
Correlation between stock and bond prices in the U.S. have reached a 10year high, reversing a broader trend of negative correlation. 
Investing
How To Trade Currency And Commodity Correlations
Relationships between currencies and commodities exist throughout the financial markets. Find out how to trade these trends. 
Trading
Using Currency Correlations To Your Advantage
Knowing the relationships between pairs can help control risk exposure and maximize profits. 
Investing
What's the Correlation Coefficient?
The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ... 
Investing
Diversification: Protecting Portfolios From Mass Destruction
This investing strategy retains its charm as a protection against random events in the market. 
Investing
Tales From The Trenches: Perfectly Negative Profitability
Use correlations to profit when two specific instruments move in opposite directions.