Correlation Coefficient: Gold vs Silver

What it shows

One line in its own pane under the price, with guide lines at +1, 0 and -1. The line stays between -1 and +1. A line near the top means the two prices have been rising and falling together over the window; near the bottom, one has risen as the other fell.

How Pravex works it out

1. Take the chart market’s Source price (the close by default) and the second market’s Source price on the same candles. The second market’s bars are fetched on the chart’s timeframe and matched to each chart candle by time: the latest second-market candle that opened at or before it.
2. For every candle, look at the last Length candles of both series. A window with a missing value gives no reading.
3. Work out the averages of both series, the average of their product, and each series’ variance (the average of its squares minus the square of its average; divided by Length, not Length − 1).
4. Correlation = (average of a × b − average of a × average of b) ÷ √(variance of a × variance of b). The result is held between -1 and +1.
5. If one of the series is flat over the whole window, the line leaves a gap, since the division would be by almost nothing.

Settings

Setting	Default	What changing it does
Symbol	ETHUSDT	The second market, any symbol you can open on a Pravex chart. In the app the default is ETHUSDT. This page uses spot silver (XAG/USD) from the same Pravex price feed against spot gold.
Source	close	Which price of each candle goes in: open, high, low, close, (high + low) ÷ 2, (high + low + close) ÷ 3, (open + high + low + close) ÷ 4 or (high + low + 2 × close) ÷ 4. It is used for both markets.
Length	20	The number of candles in each correlation window. A short window reacts fast and swings between extremes; a long one is steadier and slower to notice that a link has broken. The minimum is 2.

How traders read it

Traders use it to check whether two markets are really moving together before they lean on one to judge the other. Gold and silver are the classic pair: when the line sits near +1, a move in silver tells you something about gold. A drop of the line toward 0 or below shows the link has loosened, which can happen when one of them starts reacting to its own news.

It also works as a diversification check. Two positions with a reading near +1 are close to one bet; a reading near 0 or below means the second position adds something different.

An example, numbers made up: the line reads 0.9 at 20 candles and 0.3 at 100. The markets have moved closely together lately, but over the longer stretch the link is much looser. Try both before you trust either.

When it misleads

Pravex correlates the prices themselves, not the candle-to-candle returns. Two markets that both trend up over the window can show a reading near +1 even when their daily moves have little to do with each other, so a high number is easier to get than it looks. A correlation also says nothing about cause or about the future: it describes the window and can flip when a market changes behaviour. With a small Length one noisy candle moves it a lot. And it needs both markets to trade over the same candles; a gap in either leaves gaps in the line.

Questions and answers

What does the correlation between gold and silver show?

How closely their prices have moved together over the last Length candles. Near +1 means they have been moving in step; near 0 means no clear link; near -1 means they have moved in opposite directions.

What is the best Length for the Correlation Coefficient?

There is no single best. The default 20 looks at about a month of daily candles. Try a short and a long length and see whether they agree; if they do not, the link has changed recently.

Is the Correlation Coefficient calculated on price or on returns?

On price. It takes the Source series of each market as it is, with no change calculation first. That makes trending markets look more correlated than their daily moves are.

Can I use it with a market other than silver?

Yes. In the app, the Symbol setting takes any market you can open on a chart, with ETHUSDT as the default.

Related: Visible Average Price, Performance, Seasonality, Historical Volatility, every indicator.