Price Ratio

When you hold one long asset and one short asset, the Price Ratio is one of the cleanest ways to visualize their relationship. It’s defined simply as:

$$\text{Price Ratio} = \frac{\text{Price}_{\text{LONG}}}{\text{Price}_{\text{SHORT}}}$$

Despite being simple, this ratio does several powerful things at once:

✔ Captures Relative Strength

Instead of tracking two separate price charts, the ratio collapses the performance of both assets into a single line.

• If the ratio trends upward, your long asset is outperforming your short.

• If it trends downward, your short asset is outperforming your long.

This is particularly useful when the two assets are highly correlated (e.g., competitors, L1 vs L2 tokens, two DeFi governance tokens, etc.).

✔ Encodes Correlation and Divergences

When two assets normally move together, deviations in the ratio often indicate:

• A temporary mispricing

• A divergence that may revert

• A possible trading opportunity

For example, if Asset A and Asset B are historically correlated but suddenly one rallies without the other, the ratio will spike — often a sign the spread might snap back.

✔ Creates a Natural Mean-Reversion Indicator

Because many asset pairs have long-term equilibrium relationships (due to fundamentals or shared market conditions), the price ratio often behaves like an oscillator:

• Overstretched highs → long is unusually strong → potential short-the-ratio setup

• Overstretched lows → short is unusually strong → potential long-the-ratio setup

This behavior is the foundation of pair trading, stat arb, and market-neutral strategies.