MA Correlation Coefficient

16 May 2023

This script helps you visualize the correlation between the price of an asset and 4 moving averages of your choice. This indicator can help you identify trendy markets as well as trend-shifts.

Disclaimer
Bear in mind that there is always some lag when using Moving-Averages, hence the purpose of this indicator is as a trend identification tool rather than an entry-exit strategy.

Working Principle
The basic idea behind this indicator is the following:

• In a trendy market you will find high correlation between price and all kinds of Moving-Averages. This works both ways, no matter bull or bear trend.
  
• In sideways markets you might find a mix of correlations accross timeframes (2018) or high correlation with Low-Timeframe averages and low correlation with High-Timeframe averages (2021/2022).
  
• Trend shifts might be characterised by a 'staircase' type of correlation (yellow), where the asset regains correlation with higher timeframe averages
  Indicator Options
  
  1. Source: data used for indicator calculation
  
  1. Correlation Window: size of moving window for correlation calculation
  
  2. Average Type:
  
  
  • Simple-Moving-Average (SMA)
    
  • Exponential-Moving-Average (EMA)
    
  • Hull-Moving-Average (HMA)
    
  • Volume-Weighted-Moving-Average (VWMA)
    
  
  
  3. Lookback: number of past candles to calculate average
  
  4. Gradient: modify gradient colors. ['Bottom', 'Centre', 'Top'] colors relate to ['Negative', 'Neutral', 'Positive'] correlation values.
  
  Plot Explanation
  
  The indicator plots, using colors, the correlation of the asset with 4 averages. For every candle, 4 correlation values are generated, corresponding to 4 colors. These 4 colors are stacked one on top of the other generating the patterns explained above. These patterns may help you identify what kind of market you're in.