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Tom Preston on the Hidden Risk Most Traders Never Check
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ticker lesson
Breakdown
0:00lesson
Correlation in trading explained
- Correlation is the relationship between two objects
- Stocks in the same industry move together
- High correlation can lead to oversized delta positions
- Check correlation before entering new trades
2:21lesson
How to check correlation on a platform
- Use platform indicators to check correlation
- Correlation ranges from -1 to +1
- Positive correlation means both assets move together
- Magnitude shows strength of correlation
4:51lesson
Interpreting correlation numbers
- Higher numbers mean stronger correlation
- QQQ has 82% correlation with SPX
- Nvidia has 77% correlation with SPX
- TSM has 84% correlation with Nvidia
7:24lesson
Implications of high correlation
- High correlation can add risk in a sector
- Nvidia and TSM are both semiconductors
- Adding trades in correlated assets increases exposure
- Correlation analysis is quick and easy
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