Rolling Correlation with Bitcoin V1.1 [ADRIDEM]

14 giu

Overview

The Rolling Correlation with Bitcoin script is designed to offer a comprehensive view of the correlation between the selected ticker and Bitcoin. This script helps investors understand the relationship between the performance of the current ticker and Bitcoin over a rolling period, providing insights into their interconnected behavior. Below is a detailed presentation of the script and its unique features.

Unique Features of the New Script

• Bitcoin Comparison : Allows users to compare the correlation of the current ticker with Bitcoin, providing an analysis of their relationship.
  
• Customizable Rolling Window : Enables users to set the length for the rolling window, adapting to different market conditions and timeframes. The default value is 252 bars, which approximates one year of trading days, but it can be adjusted as needed.
  
• Smoothing Option : Includes an option to apply a smoothing simple moving average (SMA) to the correlation coefficient, helping to reduce noise and highlight trends. The smoothing length is customizable, with a default value of 4 bars.
  
• Visual Indicators : Plots the smoothed correlation coefficient between the current ticker and Bitcoin, with distinct colors for easy interpretation. Additionally, horizontal lines help identify key levels of correlation.
  
• Dynamic Background Color : Adds dynamic background colors to highlight areas of strong positive and negative correlations, enhancing visual clarity.
  

Originality and Usefulness

This script uniquely combines the analysis of rolling correlation for a current ticker with Bitcoin, providing a comparative view of their relationship. The inclusion of a customizable rolling window and smoothing option enhances its adaptability and usefulness in various market conditions.

Signal Description

The script includes several features that highlight potential insights into the correlation between the assets:

• Rolling Correlation with Bitcoin : Plotted as a red line, this represents the smoothed rolling correlation coefficient between the current ticker and Bitcoin.
  
• Horizontal Lines and Background Color : Lines at -0.5, 0, and 0.5 help to quickly identify regions of strong negative, weak, and strong positive correlations.
  

These features assist in identifying the strength and direction of the relationship between the current ticker and Bitcoin.

Detailed Description

Input Variables

• Length for Rolling Window (`length`) : Defines the range for calculating the rolling correlation coefficient. Default is 252.
  
• Smoothing Length (`smoothing_length`) : The number of periods for the smoothing SMA. Default is 4.
  
• Bitcoin Ticker (`bitcoin_ticker`) : The ticker symbol for Bitcoin. Default is "BINANCE:BTCUSDT".
  

Functionality

Correlation Calculation : The script calculates the daily returns for both Bitcoin and the current ticker and computes their rolling correlation coefficient.

```pine
bitcoin_close = request.security(bitcoin_ticker, timeframe.period, close)
bitcoin_dailyReturn = ta.change(bitcoin_close) / bitcoin_close[1]
current_dailyReturn = ta.change(close) / close[1]
rolling_correlation = ta.correlation(current_dailyReturn, bitcoin_dailyReturn, length)
```

Smoothing : A simple moving average is applied to the rolling correlation coefficient to smooth the data.

```pine
smoothed_correlation = ta.sma(rolling_correlation, smoothing_length)
```

Plotting : The script plots the smoothed rolling correlation coefficient and includes horizontal lines for key levels.

```pine
plot(smoothed_correlation, title="Rolling Correlation with Bitcoin", color=color.rgb(255, 82, 82, 50), linewidth=2)
h_neg1 = hline(-1, "-1 Line", color=color.gray)
h_neg05 = hline(-0.5, "-0.5 Line", color=color.red)
h0 = hline(0, "Zero Line", color=color.gray)
h_pos05 = hline(0.5, "0.5 Line", color=color.green)
h1 = hline(1, "1 Line", color=color.gray)
fill(h_neg1, h_neg05, color=color.rgb(255, 0, 0, 90), title="Strong Negative Correlation Background")
fill(h_neg05, h0, color=color.rgb(255, 165, 0, 90), title="Weak Negative Correlation Background")
fill(h0, h_pos05, color=color.rgb(255, 255, 0, 90), title="Weak Positive Correlation Background")
fill(h_pos05, h1, color=color.rgb(0, 255, 0, 90), title="Strong Positive Correlation Background")
```

How to Use

• Configuring Inputs : Adjust the rolling window length and smoothing length as needed. Ensure the Bitcoin ticker is set to the desired asset for comparison.
  
• Interpreting the Indicator : Use the plotted correlation coefficient and horizontal lines to assess the strength and direction of the relationship between the current ticker and Bitcoin.
  
• Signal Confirmation : Look for periods of strong positive or negative correlation to identify potential co-movements or divergences. The background colors help to highlight these key levels.
  

This script provides a detailed comparative view of the correlation between the current ticker and Bitcoin, aiding in more informed decision-making by highlighting the strength and direction of their relationship.