OPEN-SOURCE SCRIPT
Advanced Weighted Residual Arbitrage Analyzer
Updated
The Advanced Weighted Residual Arbitrage Analyzer is a sophisticated tool designed for traders aiming to exploit price deviations between various asset pairs. By examining the differences in normalized price relations and their weighted residuals, this indicator provides insights into potential arbitrage opportunities in the market.
[u]Key Features:[/u]
[u]Usage Guidelines:[/u]
In the Advanced Weighted Residual Arbitrage Analyzer, the value set in Alert Threshold plays a crucial role in delineating a normalized band. This band serves as a guide to identify significant deviations and potential trading opportunities.
When we observe the plots of the green line and the purple line, the Alert Threshold provides a boundary for these plots. The following points explain the significance:
By monitoring these plots in conjunction with the Alert Threshold, traders can gain insights into market imbalances and exploit potential arbitrage opportunities. The convergence and divergence of these lines, relative to the normalized band, serve as valuable visual cues for trade initiation and termination.
When you're analyzing relations between two symbols (for instance, BINANCE:SANDUSDT/BINANCE:NEARUSDT), you're essentially looking at the price relationship between the two underlying assets. This relationship provides insights into potential imbalances between the assets, which arbitrage traders can exploit.
Breach of the Lower Band: If the purple line touches or crosses below the lower Alert Threshold, it indicates that the first symbol (in our example, SANDUSDT) is undervalued relative to the second symbol (NEARUSDT). In practical terms:
[u]Action:[/u] You would consider buying the first symbol (SANDUSDT) and selling the second symbol (NEARUSDT).
[u]Rationale:[/u] The expectation is that the price of the first symbol will rise, or the price of the second symbol will fall, or both, thereby converging back to their historical mean relationship.
Breach of the Upper Band: Conversely, if the difference plot touches or crosses above the upper Alert Threshold, it suggests that the first symbol is overvalued compared to the second. This implies:
[u]Action:[/u] You'd consider selling the first symbol (SANDUSDT) and buying the second symbol (NEARUSDT).
[u]Rationale:[/u] The anticipation here is that the price of the first symbol will decrease, or the price of the second will increase, or both, bringing the relationship back to its historical average.
Convergence to the Mean: As mentioned earlier, when the green line aligns closely with the purple line, it's an indication that the assets have returned to their typical price relationship. This serves as a signal for traders to consider closing out their positions, locking in the gains from the arbitrage opportunity.
It's important to note that when you're trading based on symbol relations, you're essentially betting on the relative performance of the two assets. This strategy, often referred to as "pairs trading," seeks to capitalize on price imbalances between related financial instruments. By taking opposing positions in the two symbols, traders aim to profit from the eventual reversion of the price difference to the mean.
[u]Key Features:[/u]
- Multiple Relation Analysis: Analyze up to five different asset relations simultaneously, offering a comprehensive view of potential arbitrage setups.
- Normalization Functions: Choose from a variety of normalization techniques like SMA, EMA, WMA, and HMA to ensure accurate comparisons between different price series.
- Dynamic Weighting: Residuals are weighted based on their correlation, ensuring that stronger correlations have a more pronounced impact on the analysis. Weighting can be adjusted using several functions including square, sigmoid, and logistic.
- Regression Flexibility: Incorporate linear, polynomial, or robust regression to calculate residuals, tailoring the analysis to different market conditions.
- Customizable Display: Decide which plots to display for clarity and focus, including normalized relations, weighted residuals, and the difference between the screen relation and the average weighted residual.
[u]Usage Guidelines:[/u]
- Configure the asset pairs you wish to analyze using the Symbol Relations group in the settings.
- Adjust the normalization, volatility, regression, and weighting functions based on your preference and the specific characteristics of the asset pairs.
- Monitor the weighted residuals for deviations from the mean. Larger deviations suggest stronger arbitrage opportunities.
- Use the difference plot (between the screen relation and average weighted residual) as a quick visual cue for potential trade setups. When this plot deviates significantly from zero, it indicates a possible arbitrage opportunity.
- Regularly update and adjust the parameters to account for changing market conditions and ensure the most accurate analysis.
In the Advanced Weighted Residual Arbitrage Analyzer, the value set in Alert Threshold plays a crucial role in delineating a normalized band. This band serves as a guide to identify significant deviations and potential trading opportunities.
When we observe the plots of the green line and the purple line, the Alert Threshold provides a boundary for these plots. The following points explain the significance:
- Breach of the Band: When either the green or purple line crosses above or below the Alert Threshold, it indicates a significant deviation from the mean. This breach can be interpreted as a potential trading signal, suggesting a possible arbitrage opportunity.
- Convergence to the Mean: If the green line converges with the purple line , it denotes that the price relation has reverted to its mean. This convergence typically suggests that the arbitrage opportunity has been exhausted, and the market dynamics are returning to equilibrium.
- Trade Execution: A trader can consider entering a trade when the lines breach the Alert Threshold. The return of the green line to align closely with the purple line can be seen as a signal to exit the trade, capitalizing on the reversion to the mean.
By monitoring these plots in conjunction with the Alert Threshold, traders can gain insights into market imbalances and exploit potential arbitrage opportunities. The convergence and divergence of these lines, relative to the normalized band, serve as valuable visual cues for trade initiation and termination.
When you're analyzing relations between two symbols (for instance, BINANCE:SANDUSDT/BINANCE:NEARUSDT), you're essentially looking at the price relationship between the two underlying assets. This relationship provides insights into potential imbalances between the assets, which arbitrage traders can exploit.
Breach of the Lower Band: If the purple line touches or crosses below the lower Alert Threshold, it indicates that the first symbol (in our example, SANDUSDT) is undervalued relative to the second symbol (NEARUSDT). In practical terms:
[u]Action:[/u] You would consider buying the first symbol (SANDUSDT) and selling the second symbol (NEARUSDT).
[u]Rationale:[/u] The expectation is that the price of the first symbol will rise, or the price of the second symbol will fall, or both, thereby converging back to their historical mean relationship.
Breach of the Upper Band: Conversely, if the difference plot touches or crosses above the upper Alert Threshold, it suggests that the first symbol is overvalued compared to the second. This implies:
[u]Action:[/u] You'd consider selling the first symbol (SANDUSDT) and buying the second symbol (NEARUSDT).
[u]Rationale:[/u] The anticipation here is that the price of the first symbol will decrease, or the price of the second will increase, or both, bringing the relationship back to its historical average.
Convergence to the Mean: As mentioned earlier, when the green line aligns closely with the purple line, it's an indication that the assets have returned to their typical price relationship. This serves as a signal for traders to consider closing out their positions, locking in the gains from the arbitrage opportunity.
It's important to note that when you're trading based on symbol relations, you're essentially betting on the relative performance of the two assets. This strategy, often referred to as "pairs trading," seeks to capitalize on price imbalances between related financial instruments. By taking opposing positions in the two symbols, traders aim to profit from the eventual reversion of the price difference to the mean.
Release Notes
We have introduced a significant improvement to the indicator. This enhancement provides users with greater flexibility and control over the calculations that drive the indicator's primary outputs.User Choice between Weighted and Unweighted Residuals for the purple line (difference):
We added a new user input option, allowing the choice between using weighted residuals (which account for the correlation of each relation with the screen) and unweighted residuals for the difference calculation.
This choice enables users to switch between a more nuanced, correlation-weighted view and a simpler, direct average view. The weighted view emphasizes relations that correlate more closely with the screen, while the unweighted view treats all relations equally.
Benefits:
This enhancement caters to both advanced users, who might appreciate the correlation-weighted approach, and to those who prefer a more straightforward interpretation.
It provides an on-the-fly ability to compare how weighting by correlation affects the indicator's outputs, facilitating better-informed trading decisions.
Open-source script
In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in publication is governed by House rules. You can favorite it to use it on a chart.
Disclaimer
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