Using Autocorrelation to Find Trading Signals

How to Use AutoCorrelation to Trade the Markets

Autocorrelation is the variable’s linear correlation with its own lagged values. Insights may be gotten from autocorrelation that help understand the market’s properties. For example, persistent positive autocorrelation generally happens in trending markets while negative autocorrelation generally happens in ranging markets.

The Intuition of the Trading Signals

Correlation is the degree of linear association between two variables. It is a number bounded between -1.00 and 1.00 with the following interpretations:

• A value of 1.00 represents a perfectly positive correlation which means that the two variables move in the same direction all the time.
• A value of 0.70 represents a strong positive correlation which means that the two variables move mostly in the same direction.
• A value of 0.00 represents independent variables with no linear association. They have no relationship and does not necessarily move together.
• A value of -0.70 represents a strong negative correlation which means that the two variables move mostly in the opposite direction,
• A value of -1.00 represents a perfectly negative…