On-chain Zscore | QuantumResearch

QuantumResearch On-chain Zscore Indicator

The On-chain Zscore Indicator by QuantumResearch is a cutting-edge tool designed for traders and analysts who leverage on-chain metrics to assess Bitcoin’s market conditions. This indicator calculates a composite Z-score using three key on-chain metrics: NUPL (Net Unrealized Profit/Loss), SOPR (Spent Output Profit Ratio), and MVRV (Market Value to Realized Value). By normalizing these values through standard deviations, the indicator provides a dynamic, data-driven approach to identifying overbought and oversold conditions, improving market timing and decision-making.

1. Overview

This indicator integrates multiple on-chain metrics to:

• Assess Market Cycles – Utilize Z-score normalization to detect potential tops and bottoms.
  
• Smooth Volatility – Apply EMA and standard deviation filtering to refine signals.
  
• Identify Buy & Sell Signals – Use adaptive thresholds to highlight market extremes.
  
• Provide Visual Clarity – Color-coded bar signals and background fills for intuitive analysis.
  

2. How It Works

A. Z-score Calculation

• What is a Z-score? – The Z-score measures how far a data point deviates from its historical mean in terms of standard deviations. This helps in identifying statistical extremes.
  
  Pine Script®
• Standard Deviation Normalization – Each on-chain metric (NUPL, SOPR, MVRV) is individually standardized before being combined into a final score.
  

B. On-Chain Components

• NUPL Z-score – Measures unrealized profits and losses relative to market cycles.
  
  
• SOPR Z-score – Evaluates profit-taking behavior on spent outputs.
  
  
• MVRV Z-score – Assesses whether Bitcoin is overvalued or undervalued based on market cap vs. realized cap.
  
  

C. Composite On-chain Score

• The indicator computes an average Z-score of the three on-chain metrics to create a composite market assessment.
  
• Adaptive thresholds (default: 0.73 for bullish signals, -0.44 for bearish signals) dynamically adjust based on market conditions.
  

3. Visual Representation

This indicator features color-coded elements and dynamic threshold visualization:

• Bar Colors
  
  Green Bars – Bullish conditions when Z-score exceeds the upper threshold.
  Red Bars – Bearish conditions when Z-score drops below the lower threshold.
  Gray Bars – Neutral market conditions.
  
• Threshold Bands & Background Fill
  
  • Upper Band (Overbought) – Default threshold set at 0.73.
    
  • Middle Band – Neutral zone at 0.
    
  • Lower Band (Oversold) – Default threshold set at -0.44.
    

4. Customization & Parameters

This indicator is highly configurable, allowing traders to fine-tune settings based on their strategy:

• On-Chain Z-score Settings
  
  • NUPL Z-score Length – Default: 126 periods
    
  • SOPR Z-score Length – Default: 111 periods
    
  • MVRV Z-score Length – Default: 111 periods
    
  
  
  Signal Thresholds
  
  • Upper Threshold (Bullish Zone) – Default: 0.73
    
  • Lower Threshold (Bearish Zone) – Default: -0.44
    
  
  
  Color & Visual Settings
  
  • Choose from eight customizable color modes to suit personal preferences.
    

5. Trading Applications

The On-chain Zscore Indicator is versatile and can be applied in various market scenarios:

• Macro Trend Analysis – Identify long-term market tops and bottoms using normalized on-chain metrics.
  
• Momentum Confirmation – Validate price action trends with SOPR & MVRV behavior.
  
• Market Timing – Use deviation thresholds to enter at historically significant price zones.
  
• Risk Management – Avoid overextended markets by watching for extreme Z-score readings.
  

6. Final Thoughts

• The QuantumResearch On-chain Zscore Indicator provides a unique approach to market evaluation by combining three critical on-chain metrics into a single, normalized score.
  
• By standardizing Bitcoin’s market behavior, this tool helps traders and investors make informed decisions based on historical statistical extremes.
  
• Backtesting and validation are essential before using this indicator in live trading. While it enhances market analysis, it should be used alongside other tools and strategies.
  
• Disclaimer: No indicator can guarantee future performance. Always use appropriate risk management and perform due diligence before trading.