Macro Risk On/Off Sentiment

2024년 7월 7일

Overview
As an Ichimoku trader, I've always found it crucial to understand the broader market sentiment before entering trades. That's why I developed this Macro Risk On/Off Sentiment Indicator. It's designed to provide a comprehensive view of global market risk sentiment by analysing multiple factors across different asset classes. By combining nine key market indicators, it produces an overall risk sentiment score, giving me a clearer picture of the market's mood before I apply my Ichimoku strategy.

Rationale
While Ichimoku is powerful for identifying trends and potential entry points, I realised it doesn't always capture the broader market context. Markets don't exist in isolation—they're influenced by a myriad of factors including volatility, economic indicators, and cross-asset relationships. By creating this indicator, I aimed to fill that gap, providing myself with a macro view that complements my Ichimoku analysis.

How It Works
The indicator analyses nine different market factors:

• VIX (Volatility Index): Measures market expectations of near-term volatility.
  
• S&P 500 Performance: Represents the overall US stock market performance.
  
• US 10-Year Treasury Yield: Indicates bond market sentiment and economic outlook.
  
• Gold Price Movement: Often seen as a safe-haven asset.
  
• US Dollar Index: Measures the strength of the USD against a basket of currencies.
  
• Emerging Markets Performance: Represents risk appetite for higher-risk markets.
  
• High Yield Bond Spreads: Indicates credit market risk sentiment.
  
• Copper/Gold Ratio: An economic growth indicator.
  
• Put/Call Ratio: Measures overall market sentiment based on options trading.
  

Each factor is assigned a score based on its z-score relative to its recent history, then weighted according to its perceived importance. The overall risk score is a weighted average of these individual scores.

How I Use It
Before applying my Ichimoku strategy, I first check this indicator to gauge the overall market sentiment:

• I look at the blue line plotted on the chart, which represents the overall risk score.
  
• I note the background colour: green for risk-on (positive score) and red for risk-off (negative score).
  
• I check the label in the lower-left corner, which provides specific FX pair recommendations and market expectations.
  

In a risk-on environment (positive score):

• I focus on long positions in AUD/JPY, NZD/JPY, EUR/USD, etc.
  
• I look for short opportunities in USD/CAD, USD/NOK, etc.
  
• I expect commodities and yields to rise
  

In a risk-off environment (negative score):

• I focus on long positions in USD/JPY, USD/CHF, USD/CAD
  
• I look for short opportunities in AUD/USD, NZD/USD, EUR/USD
  
• I expect increased volatility and falling yields
  

The strength of the sentiment is reflected in how close the score is to either 1 (strong risk-on) or -1 (strong risk-off). This helps me gauge how aggressive or conservative I should be with my Ichimoku trades.

Customisation
I've designed this indicator to be flexible. You can modify it to:

• Adjust the lookback period and moving average length (both default to 30)
  
• Change the weighting of different factors in the final score calculation
  
• Include or exclude specific factors based on your analysis needs
  

By combining this Macro Risk On/Off Sentiment Indicator with my Ichimoku analysis, I've found I can make more informed trading decisions, taking into account both the technical setups I see on the chart and the broader market context.

2024년 7월 30일

릴리즈 노트

New version removes the old educational labels which cluttered the script and replaces them with a real-time correlation score of the macro risk index vs the current symbol. A correlation of 1 means the symbol is moving in the same direction and proportion to the risk index, and a correlation of -1 means the opposite.

Interestingly, the correlation score validates the earlier instructions that the macro risk score is positively correlated to equities and negatively correlated to safe havens.