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Trey,
Just calculate correlation based upon your returns and ignore the
underlying price.
Gabriel
-----Original Message-----
From: Trey Johnson [mailto:dickjohnson3@xxxxxxxxxxxxxx]
Sent: Wednesday, October 27, 2004 11:34 AM
To: omega-list@xxxxxxxxxx
Subject: Correlation
Hello List,
I want to measure the correlation coefficient between the
historical trades of two different markets with the same system. I'm
doing this in order to determine whether I should add a market or not to
a portfolio, but I have a couple of questions. I've gotten the idea from
the book "Money Management for Futures Traders" by J. Nauzer. In his
example, he compares a series of historical trades between gold and
silver and it appears that the trades results are for single contracts.
If one is comparing the trades from different markets, shouldn't the
dollar volatility be held constant, by adjusting the number of
contracts, so that 'apples are being compared to apples' so to speak?
Why does he seem to ignore the time aspect of the trades, dates entered
and exited? Let's say over a 5 year period, I have 100 trades in one
market and 150 in the other, both are from the same system which is
either long or short, never flat. The trades obviously don't line up
with each other. Does this matter as it relates to the correlation
coefficient? If so, how does one work around this problem? Thanks, Trey
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