Constructing and Interpreting a Two-Asset Price Spread Indicator
Summary
This document explains a spread indicator formed from the quoted prices of two symbols. When the symbols are expected to move inversely, it reverses the second symbol before combining the quotes, effectively turning the calculation into a sum. Inputs include a weighting coefficient for each leg, an option to reverse the second leg, and scaling factors that convert quoted decimals to easier-to-read integers. It stresses aligning the two instruments' quote timestamps with their trading sessions.
The indicator can support range trading, with selling at higher spread values and buying at lower values, or analysis of support and resistance, breakouts, bounces, and trends. The text also mentions seasonal interpretation and applying technical overlays such as envelopes. These are possible readings rather than validated rules: it presents no backtest, calibration method, transaction-cost analysis, or evidence that a particular interpretation is profitable. The examples refer to currency pairs, including AUDUSD and USDCAD.
Key ideas
- A two-symbol spread combines the instruments' quotes, with the second quote reversed when modeling inverse movement.
- Weighting coefficients control each leg's proportional contribution to the spread.
- Scaling factors can make decimal quote values easier to inspect.
- The indicator's two series should be aligned to their respective trading sessions.
- Possible interpretations include range trading, level breaks, trend analysis, and technical overlays.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.