HMA Z-Score Probability Indicator by Erika Barker

27. Aug. 2024

This indicator is a modified version of SteverSteves's original work, enhanced by Erika Barker. It visually represents asset price movements in terms of standard deviations from a Hull Moving Average (HMA), commonly known as a Z-Score.

Key Features:

Z-Score Calculation: Measures how many standard deviations the current price is from its HMA.
Hull Moving Average (HMA): This moving average provides a more responsive baseline for Z-Score calculations.
Flexible Display: Offers both area and candlestick visualization options for the Z-Score.
Probability Zones: Color-coded areas showing the statistical likelihood of prices based on their Z-Score.
Dynamic Price Level Labels: Displays actual price levels corresponding to Z-Score values.
Z-Table: An optional table showing the probability of occurrence for different Z-Score ranges.
Standard Deviation Lines: Horizontal lines at each standard deviation level for easy reference.

How It Works:
The indicator calculates the Z-Score by comparing the current price to its HMA and dividing by the standard deviation. This Z-Score is then plotted on a separate pane below the main chart.

Green areas/candles: Indicate prices above the HMA (positive Z-Score)
Red areas/candles: Indicate prices below the HMA (negative Z-Score)
Color-coded zones:

Green: Within 1 standard deviation (high probability)
Yellow: Between 1 and 2 standard deviations (medium probability)
Red: Beyond 2 standard deviations (low probability)

The HMA line (white) shows the trend of the Z-Score itself, offering insight into whether the asset is becoming more or less volatile over time.
Customization Options:

Adjust lookback periods for Z-Score and HMA calculations
Toggle between area and candlestick display
Show/hide probability fills, Z-Table, HMA line, and standard deviation bands
Customize text color and decimal rounding for price levels

Interpretation:
This indicator helps traders identify potential overbought or oversold conditions based on statistical probabilities. Extreme Z-Score values (beyond ±2 or ±3) often suggest a higher likelihood of mean reversion, while consistent Z-Scores in one direction may indicate a strong trend.
By combining the Z-Score with the HMA and probability zones, traders can gain a nuanced understanding of price movements relative to recent trends and their statistical significance.

Versionshinweise

This is Version 2 of the Z-Score Probability Indicator (HMA) by Erika Barker.
Version 1 of this indicator was a heavy modification of SteverSteves' Z-score probability indicator, but I've significantly enhanced version 2 of this Z-score indicator with several professional trading features and UX improvements, while maintaining the core concept of measuring price deviations from a Hull Moving Average in terms of standard deviations.

Technical Enhancements

Adaptive Lookback Periods

• Dynamically adjusts the lookback length based on market volatility
  
• Uses longer periods in high volatility (for stability) and shorter in low volatility (for responsiveness)
  
• Configurable minimum and maximum boundaries to prevent extreme values
  
• Visual indicator shows the current adaptive period length
  

Divergence Detection System

• Identifies when price makes a new high/low but the Z-Score fails to confirm
  
• Uses a sophisticated pivot detection algorithm to reduce false signals
  
• Configurable sensitivity threshold
  
• Visual markers for both bullish and bearish divergences
  

Improved Error Handling

• Protected against division by zero in standard deviation calculations
  
• Added checks for NaN values and the first few bars where data is insufficient
  
• More robust pivot detection to reduce false signals
  

Performance Optimization

• Conditional calculations that only run when features are enabled
  
• Better variable management to reduce unnecessary recalculations
  
• More efficient code structure
  

User Interface Improvements

Organized Settings Menu

• Settings grouped into logical categories for easier navigation
  
• Added tooltips for better explanation of each option
  
• Improved defaults for better out-of-the-box experience
  

Modernized Visual Design

• Professional color scheme with Material Design-inspired colors
  
• Customizable color settings for all visual elements
  
• Improved contrast and readability
  
• Enhanced probability zone visualization
  

Interactive Information Display

• Improved Z-Score probability table with current value indicator
  
• Clear mode indicator (Adaptive vs Fixed)
  
• Better positioning of price level labels
  

Custom Alerts

• Added alerts for bullish and bearish divergences
  
• Added alerts for crossing extreme Z-Score thresholds
  
• Custom alert messages with relevant trading information
  

Code Structure Improvements

Updated to Pine Script v6

Leverages the latest Pine Script features and optimizations


Better Variable Organization

• Clearer variable naming conventions
  
• More logical grouping of related calculations
  
• Improved comments for better code maintainability
  

Fixed Syntax Issues

• Corrected issues with multi-line function calls
  
• Fixed variable scope problems
  
• Added proper conditional processing
  

Usage Recommendations
This enhanced Z-Score indicator is particularly effective for:

1. Mean-reversion trading strategies
   
2. Identifying potential reversal points
   
3. Statistical analysis of price movements
   
4. Volatility-aware market analysis
   

For best results, combine with volume analysis and trend identification tools. The divergence detection is especially useful for finding high-probability reversal points in ranging markets.

Versionshinweise

This is Version 2 of the Z-Score Probability Indicator (HMA) by Erika Barker.
Version 1 of this indicator was a heavy modification of SteverSteves' Z-score probability indicator, but I've significantly enhanced version 2 of this Z-score indicator with several professional trading features and UX improvements, while maintaining the core concept of measuring price deviations from a Hull Moving Average in terms of standard deviations.

Technical Enhancements

Adaptive Lookback Periods

• Dynamically adjusts the lookback length based on market volatility
  
• Uses longer periods in high volatility (for stability) and shorter in low volatility (for responsiveness)
  
• Configurable minimum and maximum boundaries to prevent extreme values
  
• Visual indicator shows the current adaptive period length
  

Divergence Detection System

• Identifies when price makes a new high/low but the Z-Score fails to confirm
  
• Uses a sophisticated pivot detection algorithm to reduce false signals
  
• Configurable sensitivity threshold
  
• Visual markers for both bullish and bearish divergences
  

Improved Error Handling

• Protected against division by zero in standard deviation calculations
  
• Added checks for NaN values and the first few bars where data is insufficient
  
• More robust pivot detection to reduce false signals
  

Performance Optimization

• Conditional calculations that only run when features are enabled
  
• Better variable management to reduce unnecessary recalculations
  
• More efficient code structure
  

User Interface Improvements

Organized Settings Menu

• Settings grouped into logical categories for easier navigation
  
• Added tooltips for better explanation of each option
  
• Improved defaults for better out-of-the-box experience
  

Modernized Visual Design

• Professional color scheme with Material Design-inspired colors
  
• Customizable color settings for all visual elements
  
• Improved contrast and readability
  
• Enhanced probability zone visualization
  

Interactive Information Display

• Improved Z-Score probability table with current value indicator
  
• Clear mode indicator (Adaptive vs Fixed)
  
• Better positioning of price level labels
  

Custom Alerts

• Added alerts for bullish and bearish divergences
  
• Added alerts for crossing extreme Z-Score thresholds
  
• Custom alert messages with relevant trading information
  

Code Structure Improvements

Updated to Pine Script v6

Leverages the latest Pine Script features and optimizations


Better Variable Organization

• Clearer variable naming conventions
  
• More logical grouping of related calculations
  
• Improved comments for better code maintainability
  

Fixed Syntax Issues

• Corrected issues with multi-line function calls
  
• Fixed variable scope problems
  
• Added proper conditional processing
  

Usage Recommendations
This enhanced Z-Score indicator is particularly effective for:

1. Mean-reversion trading strategies
   
2. Identifying potential reversal points
   
3. Statistical analysis of price movements
   
4. Volatility-aware market analysis
   

For best results, combine with volume analysis and trend identification tools. The divergence detection is especially useful for finding high-probability reversal points in ranging markets.