Merely coincident relationships exist in the database, and they are unlikely to hold in a future trade.
Using this website, it is easy to find pairs with statistically significant correlation coefficients, but
only you can judge whether there is enough of a real economic relationship to be worth considering.
To assist you with this task, you have two filters at your disposal:
absolute correlation level and length of history.
A correlation coefficient of 80% is more significant than a 70% correlation,
but it is equally significant to a -80% correlation.
A correlation of 9% on 100 years of data is equally significant to a 90% correlation on 1 year of data.
The longer the historical period studied the more reliable the statistical result will be.
The statistical significance level, say 99%, means that the likelihood that this result
could occur purely by chance is 1%.
Thus a higher statistical significance level reflects a lower likelihood of a false positive.
A search of 1 million pairs filtered to the 90% significance level should have
apprxomately 100,000 purely coincidental pairs and at the 99% significance level there
should be approximately 10,000 purely coincidental pairs.
This is still alot of combinations to consider, but it helps.
A larger correlation coefficient, in absolute value, is more significant, and
a correlation coefficient based on more history is more significant.
For these reasons, please only consider pairs with at least 75% correlatin over 15 years of history.
If you wish to trade a market which hasn't been at least 15 years or an instrument which has changed its character.
You may be forced to use a shorter time periods,
but be advised that false positives will be more frequent.
Warning - Trading Risk
No information on this web site should be considered a recommendation or solicitation to invest/trade in a particular instrument.
The risk of loss in trading futures and forex trading can be substantial
and may not be suitable for all investors.
You may sustain a total loss of the initial margin funds and any additional
funds that you deposit with your broker to establish or maintain a position
in the commodity futures market. Past performance is not indicative of
future results. No representation is being made that any account is likely
to achieve profits or losses similar to those shown. In fact, there are
frequently sharp differences between hypothetical and past performance results and
the actual results subsequently achieved by any particular trading program
or software. We recommend that you learn more from the Commodity Futures
Trading Commission (CFTC) or the National Futures Association (NFA).
Please check all trading ideas with a qualified financial advisor.
Margin trading involves interest charges and risks,
including the potential to lose more than deposited
or the need to deposit additional collateral in a falling market.
Options are not appropriate for all investors.