Financial Conditions Indicator (FCI)

The Financial Conditions Indicator (FCI) is a composite tool designed to help traders evaluate the tightness or looseness of financial conditions in the U.S. market. It aggregates four key metrics—VIX (stock market volatility), high-yield bond spreads (proxied by HYG), corporate bond spreads (proxied by LQD), and Treasury market volatility (proxied by MOVE)—into a single Z-score-based index. This indicator provides a visual representation of market stress and can assist in analyzing potential economic and asset price trends.
Key Features:

• Composite Z-Score: Combines standardized Z-scores of VIX, HYG, LQD, and MOVE into a unified measure of financial conditions.
  
  
• Color-Coded Output: Plots in red when conditions are tight (Z-score > 0) and green when conditions are loose (Z-score < 0).
  
  
• 10-Day EMA Overlay: Includes a 10-day exponential moving average (EMA) of the composite Z-score to highlight short-term trends.
  
  
• Customizable Parameters: Allows users to adjust the Z-score lookback period and EMA length for flexibility.
  

How to Use:

1. Add to Chart: Find "Financial Conditions Indicator (FCI)" in the Indicators menu and apply it to your chart.
   
   
2. Customize Settings (Optional):
   
   Lookback Period (Days): Sets the period for Z-score calculations (default: 160 days).
   EMA Length (Days): Adjusts the EMA period (default: 10 days).
   
   
   
3. Interpret the Results:
   
   • Red Line (Z-Score > 0): Indicates tight financial conditions, often tied to higher volatility and wider credit spreads.
     
   • Green Line (Z-Score < 0): Suggests loose conditions, typically associated with lower volatility and tighter spreads.
     
   • Yellow Line (10-Day EMA): Tracks the short-term direction of financial conditions; crossovers with the Z-score may signal shifts.

Applications:

• Monitor market stress levels to anticipate volatility or asset price movements.
  
• Use as a risk management tool for adjusting exposure in risk-on/risk-off strategies.
  
• Analyze potential economic turning points based on financial condition trends.
  
• Data Dependency: Requires at least 160 days of historical data (or the selected lookback period) for accurate Z-score computation.
  
• U.S.-Centric Design: Tailored to U.S. financial markets; applicability to other regions may vary.
  
• Supplementary Tool: Best used with other analysis methods, not as a standalone trading signal.
  

Example Scenarios:
Tight Conditions (Red Plot): A rising FCI above 0 might warn of increasing market stress, potentially signaling a pullback in equities or a spike in volatility. Traders could reduce risk exposure.

Loose Conditions (Green Plot): A falling FCI below 0 may indicate favorable conditions for risk assets, suggesting opportunities to increase equity or high-yield exposure.

EMA Signals: A Z-score crossing above the EMA could hint at worsening conditions, while a cross below might suggest improvement.

Note: This indicator is provided for informational purposes only and does not offer financial advice. Users should perform their own analysis and consider multiple factors before trading.