A technical indicator often used by experienced crypto traders to plan out trading strategies is the negative correlations. The indicator essentially states the relationship between two variables where one increases as the other goes down, or the other way around. Usually, a perfect negative correlation is the value of -1.0.
What does a perfect negative correlation mean, though?
It means the relationship between two given variables is exactly the opposite of each other. Meanwhile a 0 value on the meter means thereâ€™s no correlation between the variables, and the reading of +1.0 means a perfect positive correlation.
So, a negative correlation indicates when two given variables are moving in opposite directions and sizes from each other. Out of these two variables, one increases while the other decreases, and both move away from each other. Correlation between two variables can change over time due to various conditions. For instance, stocks and bonds in traditional markets usually maintain a good negative correlation, and so traditional portfolio strategies ask an investor to hold both these assets at once.
Negative correlation denotes that two given variables usually have a statistical relationship going between them that causes their values to move in exactly opposite directions. Advantages of this indicator include:
Measuring the relationship between two variables is particularly useful when one holds a diversified portfolio. This way, holding assets in different directions means one profits even when one asset is down, as another in direct negative correlation would be up in the meantime.
Holding two assets that move in opposite directions reduces the risks of loss than can be incurred by a portfolio.
Two assets in negative correlation would allow an investor to experience less volatility than either asset warrants. This is because especially in the case of two assets that originate from different industries, they might just play off of each otherâ€™s highs and lows and allow investors better gains.
Traders get to research new industries as they look for assets that form a negative correlation with each other. This helps them find new assets, and makes the entire investment process a lot more fun and engaging.
Now, those were the benefits of using the negative correlations indicator. As a crypto trader, however, you still have a few things to keep in mind despite these positives. For one, while investing in assets that are negatively correlated may reduce portfolio risk, it also may minimize potential gains as negatively correlated assets hedge certain types of risk.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.