Logarithmic Rate of Return Indicator or Increment of Price Logarithms for MT4

Introduction to the Logarithmic Rate of Return or Increment of Price Logarithms Indicator

Arbitrage is a technique in trading wherein traders trade for the difference between correlated assets.

This indicator is particularly useful for arbitrageurs as it allows traders to observe the discrepancies between currency pairs.

What is the Logarithmic Rate of Return or Increment of Price Logarithms Indicator?

The Logarithmic Rate of Return Indicator or Increment of Price Logarithms Indicator is a custom indicator which is a type of oscillator indicator. However, the unique feature of this indicator is that it plots oscillators for four currency pairs.

This indicator plots four oscillator lines which represent different currency pairs. This indicator is preset to plot the EURUSD, GBPUSD, AUDUSD, and NZDUSD pairs. This template has also been adjusted to plot a green line to represent the EURUSD, a blue line to represent the GBPUSD, a red line to represent the AUDUSD, and a lime line to represent the NZDUSD.

How the Logarithmic Rate of Return or Increment of Price Logarithms Indicator Works?

The Logarithmic Rate of Return Indicator uses a complex indicator which incorporates logarithms within its formula. The formula below shows how this indicator calculates for its lines.

ln(C/O) = ln(C) – ln(O)

where:

C = Close of price

O = Open of price

The indicator uses this formula for the selected currency pairs and plots the lines on its indicator window.

How to use the Logarithmic Rate of Return or Increment of Price Logarithms Indicator for MT4

This indicator allows users to change the currency pairs which each line would represent. Users simply have to change the symbol names on the “Symbol_1”, “Symbol_2”, “Symbol_3”, and “Symbol_4” fields on the Inputs tab of the indicator settings.

Users may also refer to the Colors tab of the indicator settings to identify the corresponding color of each currency pair.

This indicator can be used for arbitrage wherein traders would look for discrepancies between currency pairs that are supposed to be correlated. If one of the currency pairs deviate from the norm, such as a market spike, then traders can assume that price would revert back to the norm for that currency pair.

Buy Trade Setup

When to Enter?

Observe for a market spike going down on the indicator window while other lines stay within the normal range. Identify the currency pair represented by the market spike. Open a buy trade as the momentum stops. Set the stop loss below the entry candle.

When to Exit?

Close the trade as soon as price action shows signs of a bearish reversal.

Sell Trade Setup

When to Enter?

Observe for a market spike going up on the indicator window while other lines stay within the normal range. Identify the currency pair represented by the market spike. Open a sell trade as the momentum stops. Set the stop loss above the entry candle.

When to Exit?

Close the trade as soon as price action shows signs of a bullish reversal.

Conclusion

This technique is just one of the many ways traders can use this indicator. When trading arbitrage, traders should simply look for discrepancies among the correlated currency pairs and trade in the direction where most of the currency pairs are moving.

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