Market Correlations Basics: How Assets Move Together
Market correlations explain why different assets move together, against each other, or not at all. If you don’t understand the basic relationships between equities, bonds, the dollar, and volatility, you’re trading blind. Correlation affects momentum, reversals, and the reliability of your setups.
What Market Correlation Actually Means
Correlation measures how two markets move relative to each other. It doesn’t predict price — it tells you what environment you’re trading in.
| Correlation Type | Meaning | Trader Impact |
|---|---|---|
| Positive | Both markets move in the same direction | Confirms momentum |
| Negative | Markets move in opposite directions | Risk-on/risk-off signals |
| Zero | No meaningful relationship | Independent movement |
Key Correlations Every Futures Trader Should Know
These relationships drive daily price action whether you acknowledge them or not:
- ES ↔ NQ (strong positive correlation)
- Equities ↔ VIX (strong negative correlation)
- Equities ↔ Bonds/Yields (macro-dependent inverse)
- Dollar ↔ Commodities (usually inverse)
- Crude oil ↔ Equities (mixed; depends on macro tone)
If you haven’t read the market regime basics article yet, do that after this — regimes shift correlations constantly.
Why Correlation Matters in Real Trading
Correlation affects:
- Momentum confirmation — if ES rips but NQ lags, momentum is weaker than it looks.
- Timing entries — correlated markets turning together signal real flow.
- Risk management — correlated losses hit harder than you expect.
Beginners think they’re diversifying by trading multiple markets, but if everything is correlated, they’re just doubling their risk.
How to Use Correlation When Trading Futures
Start with these simple habits:
- Watch ES and NQ together during entries.
- Watch VIX during trend trades.
- Watch yields when equities act strange for no reason.
- Watch DXY when crude, gold, or yen futures move weirdly.
If one market confirms while another disagrees, that’s information — not noise.
Correlation Weakens During High Volatility
When volatility explodes, correlations can break temporarily. The stronger the volatility, the more correlations distort.
- ES and NQ decouple
- Commodities whip independently
- Dollar spikes break usual patterns
This ties directly into market volatility basics — volatility changes everything, including relationships.
Don’t Trade Correlation Alone
Correlation is context, not a signal. It makes your setups stronger or weaker, but it shouldn’t replace a real entry. Traders blow accounts trying to trade “because bonds moved” instead of trading the chart in front of them.
Correlation Is the Background Noise You Must Understand
You don’t need a PhD to use correlations — you just need to know which markets confirm or deny what you’re trading. Read the tape, check the related markets, and stop making trades that contradict the entire risk environment.