Building a Weighted Financial Conditions Index for Swing Signals

Summary

This strategy builds a financial regime index from eight standardized market components: US and global equity returns, credit conditions, short-term rates, the yield curve, the dollar, volatility, and a liquidity proxy. Each component is converted to a rolling z-score, with optional clipping of extreme values. The components are combined using either equal weights or weights inversely related to their recent variability, then smoothed with an exponential moving average.

The index drives long and short signals through threshold crossings and slope checks, with an optional price trend filter. Additional index levels can force or close positions. The script specifies daily data as its recommended calculation timeframe and includes trading assumptions such as commissions and slippage, but the supplied text contains no strategy report or performance results. Its signals depend on chosen symbols, windows, thresholds, normalization, and weighting; they should be treated as a proposed rule set rather than evidence of a reliable edge.

Key ideas

• The index combines standardized equity, credit, rates, dollar, volatility, and liquidity measures.
• Components can receive equal weights or weights inversely related to their recent variability.
• The smoothed composite generates directional signals through threshold crossings, slope checks, and an optional price filter.
• The script provides trading cost assumptions, but the supplied document gives no performance evidence.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.