The Z-Score transforms price into a "standard
deviation" scale,
showing how far each candle’s close (or open, high, low) deviates from its
historical mean. With an intuitive visual, it helps identify overbought/oversold
conditions and
high-probability reversal zones! 🔄

1️⃣ What Does It Do?

🔹 Standardizes Price: Converts the absolute closing value into a Z-Score—how many standard deviations it is from the mean
of the last N bars.
🔹 Highlights
Statistical Extremes: Values
near ±1, ±2, or ±3 indicate rarity in price movement:

±1 SD (≈ 68% probability between –1 and 1)
±2 SD (≈ 95% probability between –2 and 2)
±3 SD (≈ 99.7% probability between –3 and 3)
🔹 Aids
in Mean Reversion Trading:
When Z-Score exceeds ±2 or ±3, the market is in an extreme
zone and tends to
revert toward the mean (zero).
🔹 Clear
Visualization: Using histograms (or special candles), a moving average
line, and colored zones, you can instantly see if price is behaving "normally" or is a statistical
outlier.

2️⃣ How Does It Work?

📐 Calculation of Mean & Standard Deviation

A lookback
period (e.g., 99
bars) is used.
The mean and standard
deviation (SD) of
closing prices are calculated.
Higher SD = More volatility in price movements.

🧮 Z-Score Formula

Z=Current Close−Historical MeanStandard DeviationZ=Standard DeviationCurrent Close−Historical Mean

Positive Z → Close above the mean.
Negative Z → Close below the mean.

📊 Z-Table Probabilities

Highlights the
current Z-Score’s column to show how rare/extreme the price is!

3️⃣ How to Use It in Trading

✅ Mean Reversion: Look for Z > +2 or Z < –2 to trade reversals (sell overbought
extremes, buy oversold extremes).
✅ Trend Confirmation: A sustained Z
> 0 + rising moving average signals
strength; Z < 0 + falling MA suggests weakness.
✅ Risk Management: Near ±1 SD, expect normal moves; near ±3
SD, adjust stops &
position sizes carefully.
✅ Entry Timing: Combine extreme Z-Scores with support/resistance
levels for precise
entries.

4️⃣ Pros & Considerations

✔️ Advantages

Statistical edge in spotting extreme price conditions.
Multiple display modes (histogram, candles, bands, probability
table).
Easy customization (length, colors, chart type).

⚠️ Considerations:

In strong
trends, price can stay
"extreme" for long periods without reversing.
Assumes a normal
distribution—may not
work well in highly volatile/skewed markets.
Best used in stable
volatility environments.

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lifeofmichaeltrading

May 27, 2025

Good implementation of Z Scores. I found that Z Scores work best when using MTF analysis to show counter trend scalps but I am sure those who trade moving average plays will find this very useful!

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