All trading requires an understanding of how markets are related. Understanding these relationships will put you ahead of others that don’t get it.
Mean reversion and spread trades require a deeper understanding of how markets move together and how these relationships change. Like the weather, the degree of correlations, lag, convergence/divergence change all the time. It is that change that can bring about opportunity.
On TradingView, there are three really easy ways to measure relationships.
1 Use the ‘Compare’ Function. Click Compare.
Select Market.
This creates an overlay, showing relative performance in percentage terms. The starting point is the visual start of the chart.
Tip#1: Choose starting points that are significant, like just before a big announcement or at a chart high or low.
Tip#2: Play around with time frames to look for patterns. -
2 Use Relative Strength (not RSI). This is not the RSI most of us know. This ‘Relative Strength’ shows the performance of one market versus another based on momentum and change.
Select indicator and search ‘relative strength’. Look for an indicator that compares to a 2nd market. Example: ‘relative strength to SPX’. For this particular one, the default setting is to compare to SPX (obviously). In settings, change this to your chosen market. In the above chart, we use BTC.
A falling index shows market#1 underperforming. This can be used to show overbought/sold conditions, relatively speaking. -
3 Watch your Correlations. The Correlation Coefficient measures the degree of statistical relationship between two markets.
Tip: Look for extreme levels/changes in the number. It can tell of a change in trend or breakout. -
Try all three and see what works for you and your markets. Look for patterns. -
is there an easier way or a video to better understand this.. 😔
TheTradarien
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@somberPie37968, good idea. Let me put that on the coming soon list.
EBITDAtiger
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very thorough! thanks for sharing
TheTradarien
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@EBITDAtiger, Thank you EBIT, I liked you post on the VIX.
EBITDAtiger
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@TheTradarien, thanks I appreciate it! I see an opportunity there and when it's confirmed by institutional money it usually means all systems are go
TheTradarien
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@EBITDAtiger, we used to use the VIX quite a lot to help build and time options positions. Back then <20 was a good signal for blow out in vols. Now, that number is lower.