Ratio Indicator

Ratio Indicator - User Guide

This Ratio indicator between assets allows you to monitor and trade the price relationship between two assets selected by the user. It calculates the ratio between the prices of two assets, referred to as Asset1 and Asset2 (e.g., "GBPUSD" and "EURUSD"), and plots a moving average of the ratio along with Bollinger Bands. These bands are used to identify ideal entry and exit points, particularly for correlated assets, enabling an arbitrage approach.

How the Indicator Works

• Definition of Asset1 and Asset2:
  • Asset1: Corresponds to the asset displayed on the chart where the indicator is applied.
  • Asset2: Is configured by the user as a parameter of the indicator.
• Bollinger Bands on the Ratio: The indicator uses a moving average of the Asset1/Asset2 ratio with Bollinger Bands around it.
• Lower Band: When the ratio reaches the lower band, it indicates that Asset1 is cheap relative to Asset2. The strategy suggests buying Asset1 and selling Asset2.
• Upper Band: When the ratio reaches the upper band, it indicates that Asset1 is expensive relative to Asset2. The strategy suggests selling Asset1 and buying Asset2.

This approach leverages fluctuations in the relationship between assets to perform hedged operations (buying one asset and selling the other) on correlated pairs.

Explanation of Configurable Parameters

• Symbol1 and Symbol2:
  • These parameters define the assets for which the ratio will be calculated. For example:
  • Symbol1 = "GBPUSD": Defines the first asset, which will be bought or sold based on the ratio's position relative to the bands. This is the chart's asset.
  • Symbol2 = "EURUSD": Defines the second asset, used as a reference to calculate the ratio. This is configured as a parameter of the indicator.
  • Important: The assets should have a positive correlation for the arbitrage strategy to work effectively. This means their prices typically move in the same direction, making the ratio analysis more reliable.
• period:
  • This parameter configures the moving average period and Bollinger Bands.
  • Default Value: 21, representing the number of periods considered in the calculation.
  • Adjusting the Period: Shorter periods make the indicator more sensitive, capturing quicker movements, while longer periods make it less sensitive, focusing on long-term trends.
• deviation:
  • Defines the standard deviation of the Bollinger Bands around the ratio's moving average.
  • Default Value: 2.0, a common value for Bollinger Bands, representing a range that covers approximately 95% of expected ratio movements (assuming a normal distribution).
  • Adjusting the Deviation: A higher value widens the bands, generating fewer entry/exit signals, while a lower value narrows them, increasing the frequency of buy and sell signals.

This indicator is particularly useful for traders who want to trade correlated pairs and capture variations in the price relationship. It is a powerful tool for arbitrage and hedging strategies, identifying deviations from a long-term average and taking advantage of these opportunities with protected trades.