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How Are Various Investing Markets Related to Each Other?

The following is a guest post by Troy Bombardia.


Commodities: An oil refinery at dusk

In the world of investing we have something that is known as correlation. The basic definition of correlation is simple: how do changes in variable X affect changes in variable Y (oh no, more math!)?

Correlation and relations exist in the financial markets. Changes in the price of certain markets (i.e. stocks) will have impacts on prices in other markets (i.e. bonds, currencies, commodities). In this post, I’m going to examine how various markets are related to each other (their correlation).

Why is it important to understand the relationships between various markets? Because if you know how one market is reacting and what relationship other markets have to this market, you can predict what the future price of other markets will be (which equals more profits!).

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