# 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**.


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