Correlation For Traders and Investors | Statistics For the Trading Floor | Correlation Trading
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- เผยแพร่เมื่อ 28 ก.ย. 2024
- Correlation For Traders and Investors
Today we will be discussing what correlation is and why it matters to traders and investors. We will learn why stock market correlation is so high right now and why investors might care. Watch to the end of the video to learn how traders can profit from rises and falls in stock correlation which is known as correlation trading.
Patricks' Books:
Statistics for Traders: amzn.to/3eerLA0
Financial Derivatives: amzn.to/3kwsPSr
Corporate Finance: amzn.to/3fn3rvC
Patricks' Website : www.onfinance.org
Twitter: / patrickeboyle
Correlation can be done using options, variance swaps or correlation swaps.
Thanks a lot! Finally a true and serious finance channel in youtube. Unfortunately many people prefer to listen some random guys recommending stocks instead of learning to decide what to do by yourself (which is a lot harder but the only true way). Keep it going!
Greetings from Mexico!
Coffeezilla brought me here. The content is why I stayed...
Thanks!
@@PBoyle same dude but very nice data. I have learned from many teachers and ive mastered their cards. now im looking for more in depth skills and stats and ur channel is perfect for my next conquest
Sameeeee
same
Same here
Nothing like listening to a professional, kinda knowing what he is on about and realising how little you then know. By no means was I expecting to think "yeah I know what he means exactly" but at the same time it's a Pandora's box of "yeah it's a whole lot less than you even factored into your estimates".
It only makes the entire given subject even more interesting.
Best line... "when a trader bets..."
All investing is a gamble, no? And the higher returns are on the higher risk bets? But so are the losses...
I appreciate your brief summary of hedging any correlation bets. At what oint do trading costs erode the effectiveness of those hedging strategies? Is there any simple formula to calculate what those scerios look like on either side of the hedge?
I always had the doubt why assets have hight correlation even though the move on the price of one is positive and on the other asset is negative on the face of a particular event. You made clear why, tks for that video!!
Thanks, glad to help!
@@PBoyle hey patrick i was thinking of learning correlation and this phenomenon in depth. Will I be able to find it in your books?
@@ramdaitalks9366 Yep, I have a chapter on correlation and another on cointegration in the book.
@@PBoyle patrick I do not have a background in computing and data science, so will I be able to grasp the statistics for trading floor book?
@@ramdaitalks9366 I hope so. The book is aimed at beginners, and the examples are written such that you can work through them with a pen and paper.
Another great video. This channel has very good content, congratulations and thanks!
Patrick Boil 👌
I have a question although warning its probably a dumb one. Lets say for example there is high correlation between the stocks of two companies. The porcentage change of the value of their stock is the same (because they operate in the same market after all). My question is: why not use the disparity in the earnings report to predict the stock direction? Like if one had its earnings report on the first of february and the other company would report two weeks later.
The problem I find with using correlation or any other line-of-best-fit method is that correlations are usually weak and stock returns are fat tailed meaning that a single outlier will steer it this way or that. I have seen robust methods, shrinkage operators etc. but is there a more systematic way to deal with such outliers?
Great video. Would you say the book fits for a avarage guy with no finance education?
I think so as it is very clearly written. You can use the look inside feature on Amazon to get a feel for it.
Would love to know if you have any thoughts on whether high market correlation predicts direction (maybe given an existing direction), if it could be combined with the VIX as an indicator in any way, etc. I found this video because I was looking specifically for this topic (and had to dig through a bunch of videos talking about correlations between single pairs of stocks), but it seems like a topic worth further exploration.
If we are to believe Burton Malkiel in Random Walk Down Wall St., prices of different securities are usually correlated. This seems to be the case, which is why a portfolio of equities is, in the long term, the best investment. But woe betide the guy who needs the money in a hurry during bad times. They guy who piles in for the long term when the market is high is not so betidden with woe, but probably isn't happy for a while either.
Is it not true that correlated assets move in the same direction and negatively correlated assets move in opposite directions? If that is the case, then how can an ETF negatively correlated with a declining asset also decline in value?
Hey Patrick. Great channel and looking forward to your future videos.
As a long term investor shouldn't I look at a very correlated market as an opportunity?? Companies going down in tandem regardless of their real " intrinsic value". Assuming ofcourse that corona and it's impact would be immaterial in the next 5 or so years. Would love to get your views. Cheers
It is an opportunity if people are indiscriminately selling stocks that should be unaffected.
selling correlation swap , hmm. my broker doesnt seem to offer that instrument... which broker does though ? ( yes it is serious question )
That was a lot, but very useful.
very nice data
Thanks for the video. Does your book teach the basics of Statistics? if not would you be able to tell me what's the best book to get started with..
Yes, the book is well suited to someone with no prior background in statistics.
@@PBoyle thank you, i'll buy on Amazon.
Agent 47?
Bit like now. Macro pushing everything down.
You're smiling, kinda sorta 🤔☺ (oh 👏🏼)
So what are we saying 2 years later? I can't tell if we have an economy or not. Seems like a sheet fight to me. 😂
Hmm.This guy used to work for Victor Niederhoffer, who famously blew up his fund by taking too much risk.Good endorsement to listen to him or not?
Well, he's not Victor and I doubt that he was involved in picking the fund strategy. Even if that was true, he's not giving advice in his videos, just explaining the concepts (and explaining them well).
Good to see there are proper educators out there. Saw your interview with CoffeeZilla, and now i guess you're my "guru"; i.e., a smart successful individual giving free education and knowledge of value to help others. Lookin forward to more of your content. Saves me from more school debt!
For me as well!
Though I feel kind of bad about Patrick Boyle: These videos are so far above the golden standard of cat videos that is assumed as prior education for TH-cam, that I find it hard to believe that many people will watch them, even though they're brilliant . Actually, I'm surprised he has ~260k followers. I guess this is a sign that there is still hope for humanity :D
Head and shoulders above any other TH-cam finance channel . Thank you Patrick for the massive work plus wit &
terrific dress sense !
Holy shit. I didn't understand a word of that !
Are we heading for a period of sudden positive correlation of stocks and bonds? Or will Crypto be the inverse of (stocks+bonds)? I am thinking of page 185 of your statistics book.
I was looking for this kind of book. Thank you for having written one.
This channel is a gem in the youtube universe. Patrick just keep doing what you do here. BTW does anyone know of a YT channel that is of similar quality?
Fed observer but he stopped posting 2 months ago. Amazing content but he said he is taking a break but unsure if he will resume.
Check out The Compound and the Rational Reminder podcast.
@@nhlanhlanomeko No they are not that good. I recommend looking for some podcasts
I would whole heartedly disagree with @wajih chtibe... Without reservation in fact.
This list is not exhaustive & Not in order of importance or preference:
Real Vision: If you only pick one out of this list pick this one
Steven Van Metre: The self-proclaimed Bond King.... Though I wonder what Gundlach thinks of that...
The Compound, like mentioned, for a financial planner's perspective.
Plain Bagel is fine. I'll leave that there.
Anton Kreil's channel isn't, to me anyway, an educational channel really. I would say that it is worthwhile to watch, but I think that most things are interesting and worth at least checking out... generally speaking to me there is no such thing as wasted time, so that this for what it's worth
SMB Capital: This has been one of the most helpful and educational channels for me in regards to "being a trader" or "the practice of trading".
Blockchain Backer: He is extremely good at seeing patterns in charts...like spooky good.
All Star Charts: Another technical analysis channel and his content probably has the HIGHEST CORRELATION to this episode
Figuring Out Money: I've just recently started watching this channel, so like with everything here use your judgement. I watch it because he sees the market in a different way than I do.
Hugh Hendry Official: He has given me permission to express myself and to seek out how I might express myself in the markets. I hope that makes sense because its revolutionary to me.
Most Controversial:
Warrior Trading: Ross very openly deals with the emotional highs and lows of an extremely risky trading style. Learning from him has been very helpful to me.
My absolute favorite:
MIT OpenCourseWare: I have no formal finance education at all. As an American I had ZERO finance classes in school, my parents were (and are) completely financially illiterate and discouraging of my participation in finance (if you can call it that) because it's the route of all evil, and I'm not about going back to school to get an economics or finance degree at 38... I barely tolerated that expensive waste of time the first go around... The reason why I feel that way? Its because I didnt go to MIT I suppose. There clases are fan-fing-tastic. Seriously. I am currently about 1.5 years deep into, eventually, watching every episode of their channel...all 13 years worth.
If correlations are high, it is more likely that they will revert to the mean correlation rather than stay high? Market forces should cause thus to happen because the some valuations of less risky stocks would be more different than more risky stocks. Therefore wouldn’t it make more sense to do long term individual securities picking during times of high correlation?
R&D scientist here. Correlation is my bread and butter, very intersting to see how it applies to market analysis. I want to know more.
I'm a scientist as well!! Analytical/chromatography mostly with a short time doing R&D (mostly physical chemistry) for a much dispised US company (who later got bought out by their equally hated EU rival). I wonder if there is a correlation between being into science and being interested in the financial markets... Welcome to your new obsession if there is.
@@alexjensen990 I develop PCR for an ivd company. Yeah, it might very well become a new obsession! I'm taking my time before investing tho, I need to understand a little bit what I'm doing.
@@MatthieuFabrega That's awesome! So, bio-chem? That's one discipline that I never spent any time learning for my loss. You are wise to proceed carefully. I said that I am a scientist, and I truly think once you are you always are, but truth be told I am retired... or I've made a career change. I have been trading full time for almost 3 years. I wont lie, this is the most challenging, refining, and humbling thing I've ever done. So, how did I approach it? Like drinking from a fire hydrant. Be careful. Its luck that kept me from ruin in the first year. Pure luck. And having read about or researched historically significant traders, there's no telling whether I will end up being successful. Some of histories most successful traders bankrupted themselves...for a couple several times. Furthermore, its arguable as to whether or not trading was a net gain in their lives because it seems to be the source of as much or more calamity than blessing in aggregate.
I responded to another comment for this video with some channel recommendations if you're interested. Take special note of the free courses that MIT puts out on their channel. Their class on the math of the stock market was incredible. I watched the whole thing 2 times. As an added bonus their other math, science, and CS classes are awesome as well.
Well, best of luck!
-Alex
@@alexjensen990 Molecular Biology. But the most important aspect of my job relies on statistical design of experiments and data analysis. The more experience I get and the more I feel like a statistician/engineer. Trading full time is pretty bold! I don't thing I'll ever get there, I'm just curious about the all process. It still doesn't make much sense to me
I know that this is a beat up topic, but if you're analyzing market, I have found that in this economy more than ever, crypto is the way to go. You can find both corelated and uncorelated assets. Aldo, even if two are corelated, they move by the different percentage. This allows you to create a quality portfolio, and in my opinion, gives you the best choices to manage risk (standard deviation), average gain, and volatility. I've found some hedge fund strategies for stability useful too. You can find cryptis with expected growth, but negatively corelated standard deviation and create a much stabler curve of growth. I have concluded that since corona started, the whole stock market is an elaborate ponzi scheme type collective savings account and there will be an inevitable crash when we reach the point were people will have smaller and smaller portion of their funds to invest and eventually have to cash out. There is only one way that this could go on forever (and it's possible) and that is a significant increase of inflation for prolonged period of time. This inflation, like now, would be hard to detect and it will start popping in random areas of the economy. Currently it's the materials (steel, wood, concrete etc.). But once the inflation starts being present in everyday life, even though the stock market can grow, you won't be able to determine your returns because the money isn't stable anymore.
I'm also a chemist btw, so what do I know? XD
Everyone is smart in the bull market. But i made money both longing and shorting.
Ps. I'm basing my stock market analysis on a very simple thing and that is the dividend payoff. In my opinion, the dividend payoff was the only thing so far that didn't make the market a pure ponzi scheme. This allows you to gradually increase your investments with old investments without reducing your position. A compwny with a stock that suddenly doubled cannot increase the dividend proportionaly, and cannot easily change it's fundamentals unless it dilutes the value. Since new investors don't understand this concept, any type of profiting would destroy the reputation and cause sudden sellof of the stock. In crypto, this is done by staking (only some crypto can be staked). So basically, due to the inefficiency and requirements for middle men and fees, the stock market in the future will completely be replaced by the crypto.
Pat’s videos are basically audio books for people who like to watch TH-cam vids. I actually take notes on these videos.
I gave you a thumbs up and no doubt very useful but there is a vast amount of jargon and foreign concepts to the average viewer so possibly slow down and use lament terms at times?
how to calculate the s&p 500 index 3 months realized correlation?
What are you thoughts on risk & reward ratios of 1:3 or higher? I've been day trading and swing trading for 5 years now. I have exhausted all my efforts in finding "the ultimate strategy" and have failed. I realized that trading has more to do with psychology and RVR than finding the golden strategy. Averaging 1:10 to 1:20 rvr per trade after have 3-5 losses in a row on average. The only negative i see with this strategy is the ability to stay the course with a higher percentage of losing trades. btw, I am only risking 1% of my account per trade and I trade the foreign exchange market. I would appreciate your thoughts on any potential flaws my thinking may have. Thanks in advance.
Amazing content....wish I had seen your videos before losing money ... so fortunate to have you on youtube! Quick question : what is your take on trading divergences in highly correlated markets ?
Hi, I have covered some of those types of trade in my Applied Portfolio Management playlist where I have two videos on hedge fund strategies.
Great video Patrick can you do a video on swing trading peace.
Yes I bought the book. Will start reading it next week
Hey Patrick! Thanks for this helpful video on correlation! Just wondering if your new book has a kindle version so I can purchase it electronically? Thanks again!
Hi Terry, It is not available on kindle yet. Right now it is just available in printed format.
@@PBoyle would love to buy it on kindle too
@@LocoCioco Unfortunately it is not yet available as an e book yet.
unfortunately it is not available electronically yet.
I always wondered why my strategy works. I thought i was smart doing that but patrick just explains me my strategy. Noice
is there a mechanism to calcluate correlation or a website that does this?
It can be done in Excel. www.techwalla.com/articles/how-to-use-excel-for-correlation
While calculating correlation between stocks, whether stocks should be of comparable companies ? for e.g stock of apple co and samsung co.
Correlation between stocks in the same sector would be expected to be higher. Often you would be looking at correlation between a stock and a broad based index, or your own portfolio.
@@PBoyle Thanks. 👍😊