Z-Score Regimes and Smoothed Markov Transition Probabilities

Summary

This indicator classifies market conditions as bullish, bearish, or neutral and estimates how often one state transitions to another over a rolling lookback. Its regime engine uses z-score-normalized price returns by default, or combines up to three normalized custom indicators with equal weights. Thresholds determine each signal, and the script description notes hysteresis and a directional bias output. Transition estimates use a rolling window and Laplace smoothing, and updates are restricted to confirmed bars.

The indicator visualizes states and transitions with animated three-dimensional spheres, arrows, and moving particles; it also exposes the current state in the data window. These graphics present the model’s estimates, rather than evidence of predictive performance. The document provides no backtest, benchmark, or trading results, and the excerpt is incomplete, so implementation details cannot all be assessed. The lookback length affects responsiveness versus stability, while state thresholds and input indicator choices shape the classifications.

Key ideas

• The default regime signal is based on z-scores of price returns, with an option to use three custom indicator inputs.
• The model classifies observations into bullish, bearish, or neutral states using configurable statistical thresholds.
• Rolling transition probabilities use Laplace smoothing and update on confirmed bars.
• The visualization displays regime states and estimated transitions but does not establish their predictive value.

Tags

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