Correlation Trading
Correlation Trading
Trading connected events where one outcome influences another.
In the world of events, things rarely happen in isolation. Correlation describes how two events move together.
Positive Correlation
If Event A happens, Event B is more likely to happen.
- Example: "Biden wins election" AND "Democratic Party wins Senate".
- Strategy: If you see Biden's odds spike, you should immediately buy "Dem Senate" shares before the market catches up.
Negative Correlation
If Event A happens, Event B is less likely to happen.
- Example: "Fed hikes interest rates" AND "S&P 500 hits all-time high".
- Strategy: If unexpected inflation data comes out (Rates likely up), you sell your "S&P 500" shares immediately.
Conditional Markets
Polymarket sometimes offers "Conditional Markets" (e.g., "If Trump wins, will he fire Powell?"). These are pure plays on correlation.