Serial Correlations
Candlefocus EditorSerial correlation is calculated from the data points in a time series using an autocorrelation function. Autocorrelation determines the relationship between the current points of a data series and trailing points in the series which are lagged at a certain length. This helps to explain the behavior of a given security over time and assess whether the price or returns move in a consistent pattern, or if there is unpredictable volatility. The closer the correlation is to 1, the greater the relationship between the points, indicating a stronger pattern in the dataset.
The analysis of serial correlations can help technical analysts to identify profitable patterns in the securities they are analyzing. For example, if a serial correlation is found to be strengthly positive, the security may be in an up-trending pattern. Serial correlations can also help to measure the risk associated with an investment opportunity. Riskier investments can be identified when the serial correlation is not very strong indicating a less predictable pattern.
In conclusion, serial correlations are an invaluable tool used in technical analysis and financial forecasting. By analyzing the strengths of correlations within an asset’s price or returns over various intervals, analysts can gain insight into an asset’s prediction, future performance, and the associated risk. Therefore, investors are able to make better informed decisions about the securities they buy and sell.