We explore two common misconceptions regarding correlation and trend-following strategies.

## Misconception 1 – “Trend-following strategies will make money when markets drop”

Trend-following strategies and stock markets may be uncorrelated over the long term, but that does not mean their returns move in opposite directions.

In Figure 1, we plot some toy data to demonstrate what happens for different levels of correlation between two dummy assets.

On the left, the dummy stock market and trend-following strategy have a negative correlation of 0.6. In the middle, the two investments have zero correlation with one another. And on the right they have a positive correlation of 0.6.

## Figure 1: Three asset pairs – one with negative correlation, one uncorrelated and one with positive correlation