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Creator : Edward Altman
In the Z Score indicator, two lines are plotted below the chart.
A Z-Score measures the difference between price and mean and divides it by standard deviation.
A Z Score indicator calculates the difference between price and the moving average, which indicates trend strength. Standard deviation is a measure of volatility. It is calculated by dividing the strength of the trend by volatility.
As an indicator, we can plot this below the price chart or ratio chart. The Z-score of 0 indicates that the price is trading at its average. A positive Z-score indicates that the price is trading above average. In the case of a negative Z-score, the price is below the moving average.
The Z-score of +2 indicates that the price is two standard deviations above the mean. The Z-score of -2 indicates that the price is two standard deviations below the mean. In most cases, the indicator remains between 2 and -2.
When the indicator reaches below -2 SD and turns up, this strategy is based on mean reversion based on Z-score.
The indicator table value in TradePoint & RZone also provides you with a list of all values of this indicator for any group of stocks. This will allow you to compare the readings of this indicator across different stocks.
This indicator is also available in the System Builder on RZone & TradePoint for all charting methods. Using the system builder, you can develop various strategies based on the different conditions already present in this indicator. Additionally, it can be used with other indicators or price patterns to develop effective trading strategies. For any group of stocks and market segments, you can scan and backtest stocks based on those strategies.
The indicator is applicable to all types of charting. It is calculated based on the number of columns on P&F charts, bricks on Renko charts, lines on Line-break charts, candles on Heikin-Ashi charts, and lines on Kagi charts. While the formula and reading of the indicators remain the same, they become more dynamic on these charts.