MVRV by Age Approximation

ieri

Description:
The "MVRV by Age Approximation" indicator provides a simplified version of the Market Value to Realized Value (MVRV) ratio for different holding periods, or "age cohorts." MVRV is a popular metric in on-chain analysis that compares the current market value to the realized value (i.e., the cost basis of held assets). In this approximation, the script categorizes assets into three main cohorts—short-term, mid-term, and long-term—by calculating MVRV ratios based on different moving averages of the closing price, serving as proxies for the acquisition cost of each cohort.

This tool helps to visualize how different holding periods contribute to the overall unrealized profit or loss in the market, which can indicate potential overvaluation or undervaluation across various investor groups. By using overvaluation and undervaluation threshold lines, traders can assess market conditions more clearly, potentially helping to identify areas of buyer or seller interest based on holding duration.

Note: This indicator serves as an approximation for the MVRV by Age metric, typically used in on-chain analytics, and is designed for educational and illustrative purposes within the limitations of TradingView’s platform.

Features:

Customizable periods for short-term, mid-term, and long-term cohorts.
Visual MVRV ratios for each cohort, enabling easy comparison.
Threshold lines for potential overvaluation and undervaluation levels.
Shaded background to highlight zones of high or low valuation.
This indicator is useful for traders interested in on-chain metrics and can be adapted to various asset types where holding duration analysis is relevant.


HOW to use:

The "MVRV by Age Approximation" indicator can help identify potential overvaluation and undervaluation in an asset by providing insights into the unrealized profit and loss held by different age cohorts of holders. Here’s a practical guide on how to use this indicator for trading:

1. Identify Overvaluation and Undervaluation Zones

Overvaluation Zone: When any MVRV ratio (e.g., short-term, mid-term, or long-term) is significantly above 1 (e.g., 1.5 or higher), it indicates that the cohort is holding assets at a profit, potentially close to a local high. This can signal that holders in this group may soon start realizing profits, which could lead to selling pressure.
Undervaluation Zone: When the MVRV ratio for any cohort falls below 1 (e.g., 0.5 or lower), it suggests that these holders are at an unrealized loss. Historically, undervalued zones often indicate a bottoming signal, as selling pressure may decrease, and long-term holders may start accumulating.

2. Trading Strategies Based on MVRV Ratios
Mean Reversion Strategy:

If the short-term MVRV ratio is in the overvaluation zone (e.g., above 1.5), this could indicate an overbought condition for recent buyers, suggesting a possible correction or reversal. Traders might consider selling or shorting if other indicators align.
Conversely, if the short-term MVRV is in the undervaluation zone (e.g., below 0.5), this could indicate an oversold condition, where short-term holders are likely at a loss. Traders could consider buying or scaling into a position, anticipating a reversion to the mean.
Long-term Accumulation and Distribution:

When the long-term MVRV ratio enters an undervaluation zone, it often signals that long-term holders (e.g., 200-day) may be under water, suggesting a potential accumulation phase. This zone could be favorable for long-term investments or entry positions, as selling pressure typically reduces here.
If the long-term MVRV ratio rises well above 1, it indicates long-term holders are sitting on profits, which might lead to increased distribution. If both short-term and long-term MVRV ratios are high, it may indicate an overheated market, suggesting a good time to take profits or reduce exposure.

3. Divergence Analysis Between Cohorts

Bullish Divergence: When the price of the asset is falling or consolidating, but the short-term MVRV rises above its undervaluation threshold (0.5) while long-term MVRV also increases, this suggests that short-term holders are regaining confidence, potentially signaling an upcoming reversal or rally.

Bearish Divergence: When the price is rising but the short-term MVRV shows signs of flattening or declining in the overvaluation zone, it may indicate that short-term traders are starting to exit positions, which could foreshadow a price pullback.

4. Combine with Other Indicators

Moving Averages: Use moving averages or other trend indicators alongside MVRV to confirm entry and exit points. For example, an overvalued short-term MVRV paired with a price cross below a major moving average can be a stronger sell signal.
Volume and Momentum Indicators: Indicators like RSI or MACD can add further context. For instance, if the MVRV indicates undervaluation but RSI is also oversold, it may confirm a strong buying opportunity.

Example Trading Signals

Buy Signal: The short-term MVRV ratio is below 0.5 (undervalued), and the price is showing signs of support with additional bullish signals from other indicators. Consider buying in anticipation of mean reversion.

Sell Signal: The short-term and long-term MVRV ratios are both above 1.5, and momentum indicators are showing divergence or overbought conditions. This setup may suggest a strong overvaluation, suitable for taking profits or initiating short positions.
Risk Management
Use stop-loss orders to manage risk, especially if trading based on the shorter-term MVRV values, as these may fluctuate more rapidly.
Adjust position sizes based on the cohort's timeframe; positions on the long-term MVRV signals may be held longer, while short-term MVRV signals might call for quicker trades.
By combining the MVRV by Age Approximation with other trading tools, you can add a unique layer of on-chain-like analysis to your trading strategy, helping gauge market sentiment across different holding periods.