**What
is the Correlation Coefficient?**

This is the definition from Financial Forecast Center (http://www.neatideas.com/cc.htm).

*What is the Correlation
Coefficient?
*

*The correlation coefficient
concept from statistics is a measure of how well trends in the
predicted values follow trends in the actual values in the past. It is a
measure of how well the predicted values from a forecast model "fit"
with the real-life data.
*

*The correlation coefficient
is a number between 0 and 1. If there is no relationship between the
predicted values and the actual values the correlation coefficient is 0 or very
low (the predicted values are no better than random numbers). As the
strength of the relationship between the predicted values and actual values
increases so does the correlation coefficient. A perfect fit gives a
coefficient of 1.0. Thus the higher the correlation coefficient the
better.
*

For practical usage, you should know that:

1 - Means ideal coincidence between some data.

0 - No correlation. Two sets of data are not related.

-1 - This is anti-correlation, which means that the predicted values "mirror" the actual values (or one data set is the "mirror" for another one).

These are examples:

Positive correlation (=0.5); these two curved lines show the same price movement (most of the time). In other words, price goes up or down for both lines:

No correlation (0.07); these two curved lines show totally different movements (if one goes up, the other may go up or down and there is no regularity seen):

Negative correlation (=-0.4); we observe the "mirror" effect (when one curved line goes up, the other one goes down in most cases, and vice versa):

What correlation is good enough? The more the better. Usually, the models that we analyze provide 0.1-0.2 correlation. Sometimes it is more than that, but these results are not stable. To be sure that this result is not accidental, it is necessary to have a sufficient amount of price bars for calculating the correlation.

This table shows the sufficient amount of price bars for different correlation coefficients (Student's t-distribution):

Correlation |
Amount of price points to be sure that this result is not accidental |

0.1 |
390 |

0.2 |
100 |