# What It Is, How It Works, Tests

Contents

## What Is Autocorrelation?

Autocorrelation is a mathematical illustration of the diploma of similarity between a given time sequence and a lagged model of itself over successive time intervals. It is conceptually much like the correlation between two totally different time sequence, however autocorrelation makes use of the identical time sequence twice: as soon as in its authentic type and as soon as lagged a number of time durations.

For instance, if it is wet at present, the info means that it is extra prone to rain tomorrow than if it is clear at present. With regards to investing, a inventory might need a powerful constructive autocorrelation of returns, suggesting that if it is “up” at present, it is extra prone to be up tomorrow, too.

Naturally, autocorrelation is usually a useful gizmo for merchants to make the most of; significantly for technical analysts.

### Key Takeaways

• Autocorrelation represents the diploma of similarity between a given time sequence and a lagged model of itself over successive time intervals.
• Autocorrelation measures the connection between a variable’s present worth and its previous values.
• An autocorrelation of +1 represents an ideal constructive correlation, whereas an autocorrelation of -1 represents an ideal unfavorable correlation.
• Technical analysts can use autocorrelation to measure how a lot affect previous costs for a safety have on its future value.

## Understanding Autocorrelation

Autocorrelation will also be known as lagged correlation or serial correlation, because it measures the connection between a variable’s present worth and its previous values.