# What is Correlation Coefficient?

The strength and direction of this relationship is the correlation coefficient. The correlation coefficient is a statistical measure that quantifies the degr...

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One tool that traders use to measure the strength and direction of this relationship is the correlation coefficient. The correlation coefficient is a statistical measure that quantifies the degree to which two variables move in relation to each other.

## Formula for Calculating the Correlation Coefficient

The correlation coefficient is calculated using the following formula:

Correlation Coefficient (r) = (nΣxy - ΣxΣy) / sqrt((nΣx^2 - (Σx)^2) * (nΣy^2 - (Σy)^2))

In this formula:

• r represents the correlation coefficient

• n is the number of data points

• Σxy is the sum of the product of the x and y values

• Σx is the sum of the x values

• Σy is the sum of the y values

• Σx^2 is the sum of the squared x values

• Σy^2 is the sum of the squared y values

## Interpreting the Correlation Coefficient

The correlation coefficient ranges from -1 to +1. Here's how to interpret the values:

• A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the two variables move in the same direction with a strong linear relationship.

• A correlation coefficient of -1 indicates a perfect negative correlation, meaning that the two variables move in opposite directions with a strong linear relationship.

• A correlation coefficient close to 0 indicates no linear relationship between the variables.

It's important to note that the correlation coefficient only measures the strength and direction of the linear relationship between two variables. It does not imply causation or provide information about the magnitude of the relationship.