We present a new technique for optical correlation using gated holographic recording by which the holograms are localized in separate slices along the recording medium. We compare the performance of localized holographic correlators (LHCs) with that of the conventional correlators using normal volume holography. Crosstalk, shift invariance, and the capacities of the LHC and of the conventional method are examined. We show that the proposed method has better performance and distinctive advantages over the conventional method. These advantages include selective recording and erasure for dynamic pattern modification, extendable capacity, and compactness.