Convergence/divergence indicator

Convergence/divergence indicator (CDI)

Class: arbitrage oscillator
Trading type: intraday trading
Time frame: 1 hour
Purpose: trading on divergence
Level of aggressiveness: standard

Arbitrage - several logically related transactions aimed at profit from the difference in prices for the same or related assets at the same time in different markets.

Pair trading is a trading strategy based on trading a pair of financial instruments that have some fundamental or statistical relationship, expressed in the fact that the price ratio of these instruments tends to return to a certain average value in the long term.

“Convergence/divergence indicator (CDI)” using correlation analysis from different time frames provides information about statistical relationship between pair of assets.

Correaltion - a statistical relationship between two variables, showing that a larger value (in the case of positive, direct correlation) or a smaller (in the case of negative, inverse correlation) corresponds to a larger value of one value in a certain part of the cases.

The correlation coefficient is a statistical measure of the strength of the relationship between the relative movements of two variables.

The values range between -1.0 and 1.0.

A correlation of -1.0 shows a perfect negative correlation, while a correlation of 1.0 shows a perfect positive correlation.

A correlation of 0.0 shows no linear relationship between the movement of the two variables.

“Convergence/divergence indicator (CDI)” a) allows to find assets where pair arbitrage is possible and determines the moments in time and prices when the conditions for pair arbitrage are ideal.

“Convergence/divergence indicator (CDI)” evaluates the statistical relationship between pair of assets in a particular period of time and, if it is available, seeks for the divergence in price fluctuations of these “identical” assets.

“Convergence/divergence indicator (CDI)” displays the current value and dynamics of the Pearson correlation coefficient for a pair of selected assets based on daily (thick blue line) and hourly (thin red line) data.

Basic parameters:
- asset 1 (name of the trading instrument 1);
- asset 2 (name of the trading instrument 2);
- period_d (number of periods used to calculate daily correlation).
- period_h (number of periods used to calculate hourly correlation).

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