by Avi Gilburt
I know that many investors follow correlations as if they were gospel. But, do they really understand what a correlation represents?
You see, markets are not linear in nature. While two different markets may be traveling in the same direction for a period of time, unless you understand each chart on its own, how will you ever know when a seeming correlation will break? And, if you assume that they will align indefinitely, how long does it take for you to cut your losses in determining that a seeming correlation has broken?
Remember, when you are following a correlation, all you are doing is assuming a relationship will continue indefinitely in a linear manner, despite the fact that markets are simply not linear in nature.