What does the term "correlation" mean in trading?

The term "correlation" in trading specifically refers to the degree to which two securities move in relation to each other. This metric helps traders and investors understand how the price movements of one security are likely to influence or relate to the price movements of another. A positive correlation indicates that the two securities tend to move in the same direction, while a negative correlation means they move in opposite directions. This concept is crucial in portfolio management and risk assessment, as it aids in the diversification of holdings and helps to mitigate potential risks associated with correlated asset price movements. Understanding correlation can provide insights on hedging strategies and can inform trading decisions based on the relationships between different assets.