I’m Having some trouble telling which pair is overvalued and which is undervalued in a correlation strategy.
I’ve seen various videos and articles which show two pairs on the same chart where the author/presenter will say something like “Pair A is above pair B: therefore A is overvalued and B is undervalued”. Simple enough. In their articles and videos, when scaling, panning, etc, all data points maintain their relationships between the two currencies.
In TradingView, however, if you add a second currency to the chart, pair A may appear to be above pair B at time x but when you drag the chart left/right through time, pair A will sometimes “move” and appear below pair B at the same time x. This is clearly an issue with how the different charts are scaled but I’m not sure what else I need to be doing to tell which is truly overvalued and which is undervalued. Handling this in a purely graphical manner seems risky - it feels like there should be something available (maybe in an additional indicator) which would more objectively state over/under value relationships.
So my questions are:
- How do I tell which is overvalued and which is undervalued? Are there other indicators used to determine this?
- If there are correlated pairs with prices at different scales of absolute values (EUR/USD & AUD/JPY), is the answer to question #1 the same solution to this scenario?
I’m not necessarily interested in the particular steps to display this in TradingView. I’m mostly interested in the element of pair correlation that makes it so simple for these content creators to so confidently state that one pair is over/under-valued in relation to another.
Thanks!