Using correlation coefficient to determine the possible price movement of a crypto asset

The summary of every trader's job is to look for and exploit opportunities with price movements in the market.

So it happens that, whenever a trader identifies an opportunity in the market and takes the opportunity the next step for the trader is to look for the next opportunity.

We can say that seeking opportunities in the market is a never ending cycle that repeats itself regardless of the stress and complications that are abound in opportunity seeking in the market.

Identifying an uptrend in the price movement of a crypto asset is the first stage of picking a suitable for coin to invest in whether in the short term or long term based on my strategy.

I have come to find out that being able to find coins that currently have an uptrend in the market can be a daunting task that involves switching between tabs and studying price charts for the asset to determine where the trend is going.

Recently, I was privileged to come across a method/indicator that I can use in pinpointing coins that are currently in an uptrend.

This indicator has been existing for a long time now and is certainly not a new invention, but I am just discovering it and I would love to share it with other members of this community for those that don't know.

This indicator should not be the only factor to base your buys on, what I use this indicator for is to identify coins in an uptrend and then subject those coins to further analysis.

Correlation coefficient

The correlation coefficient indicator, compares the price history of two separate assets and the uses that to determine whether the price movements of both coins have a correlation.

Two coins A and B are said to correlate either mildly or strongly if the price movement of coin A has an effect on the price movement of coin B.

That is to say that, if coin A moves up in an uptrend and coin B moves up in an uptrend at the same time both coins are said to correlate.

Whether they correlate mildly or strongly can then be determined by the level of the correlation on the correlation chart.

The measure of correlation on the chart is usually between the numbers -1, 0 and 1.

If the correlation is between 0 and -1, the two assets are said to have a negative correlation and this means that the price movement moves in opposite directions to each other.

If the correlation is at 0, the two assets are said to have no correlation whatsoever.

If the correlation is between 0 and 1, the two assets are said to have a positive correlation and this means that the price movement moves in the same direction to each other.

The chart in the image below shows the correlation between ETH and BTC between 13th of January 2020 and 6th of July 2020.

From the image above it can be deduced that ETH has more positive correlation with BTC within the provided period.

Though recently the level of positive correlation between both assets has been declining but nevertheless there is still a positive correlation between them.

And truly, if we check the price history of both coins manually, we will find out that whenever the price of BTC rises, the price of ETH also tends to experience an upward move.

How I use the correlation coefficient indicator to locate opportunities in the market

Mostly, whenever I find out that Bitcoin is in an uptrend, I simply start comparing the correlation coefficient of other altcoins against Bitcoin in order to get coins that are in a strong positive correlation with Bitcoin during that period.

If it happens that a coin is in a strong positive correlation with Bitcoin from my findings, I would add that coin to my watchlist and subject it to further technical analysis using other effective indicators such as the MACD and the RSI.

The result of my further analysis would then determine when and where I place a buy order for the coin.

Please note this two points though

• for this strategy to produce the desired result, Bitcoin which happens to be the mother and main influencer of all cryptocurrencies and their price action must be in an uptrend

• Also, this strategy cannot be used singlehandedly to decide entry points, instead it should be used as a shortlisting tactic that can be used to curate assets that will be subject to further analysis.