Correlation & Mean Reversion - Paired Stocks/ETFs (By MC)

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This indicator is designed to help identify mean reversion opportunities between two correlated instruments, such as ETFs or stocks (e.g., SPY vs. TLT). It provides statistical insight, visual signals, and a summary table to support pair trading strategies.

🔍 Key Functions:
Price Ratio Analysis
Calculates and monitors the price ratio (A/B) between two user-defined tickers over a rolling period.

Z-Score Calculation
Measures how far the current ratio deviates from its mean in standard deviation units (Z-score), with safeguards against unstable values.

Mean Reversion Probability
Uses a normal distribution function to estimate the likelihood of the ratio reverting to its mean — shown as a percentage.

Rolling Correlation
Computes the correlation of log returns between the two instruments to gauge relationship strength.

| Correlation Value | Interpretation |
| ----------------- | ----------------------------- |
| +1.0 | Perfect positive correlation (price of both move in the same direction)|
| +0.7 to +0.9 | Strong positive correlation |
| +0.4 to +0.6 | Moderate positive correlation |
| 0 | No correlation (independent) |
| -0.4 to -0.6 | Moderate negative correlation |
| -0.7 to -0.9 | Strong negative correlation |
| -1.0 | Perfect negative correlation (price both move in the opposite direction)|

Trade Signal Alerts

🔴 Strong Mean Reversion if probability > 95%

🟡 Moderate Mean Reversion if probability > 80%

• % Reversion >= 0.9 - "High"
  
• % Reversion >= 0.8 - "Moderate High"
  
• % Reversion >= 0.6 - "Low"
  
• % Reversion < 0.6 "Very Low"
  

Color-Coded Backgrounds & Signal Markers
Visual indicators appear on the chart to flag potential trade setups.

Stats Table (Mobile-Optimized)

Displays:

Symbol A & B

Ratio
Z-Score
Mean Reversion %
Rolling Correlation
Trade Quality: High, Moderate High, Low, or Very Low (color-coded)
User Customization
Table position (top/bottom left/right)
Toggle display of plots (Z-score, correlation, ratio overlay)
Chart style for mean reversion % (line/histogram)

🎯 Use Case:
This tool is ideal for pair traders looking to exploit statistical arbitrage opportunities by entering trades when price relationships deviate from their historical norm.

7 saat önce

Sürüm Notları

Previous method used to calculate Mean Reversion % probability method did not represent the usual probability of reverting to the mean. Instead, it represented the probability of a move being in the tail beyond |z|.

Updated calculation method now shows probability of mean reversion (the closer to zero, the more likely to revert) using two-sided p-value (twice the tail area).

7 saat önce

Sürüm Notları

Previous method used to calculate Mean Reversion % probability method did not represent the usual probability of reverting to the mean. Instead, it represented the probability of a move being in the tail beyond |z|.

Updated calculation method now shows probability of mean reversion (0-100 %) using two-sided p-value (twice the tail area).