Day trading with Z-Score averages

A strategy based on the ‘mean reversal’ concept

A share price that deviates significantly from the average tends to revert to the average. The Z-Score strategy is based on this concept. The strategy was detailed in a professional article in Traders Magazine.

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The Z-Score strategy is applied to a 15-minute chart. Central to the strategy is the Z-Score factor. The Z-Score measures and shows how much the share price deviates from the average share price over 20 days. The Z-Score is an oscillator – in other words, a figure that fluctuates around 0.

• A Z-Score above +2.0 indicates euphoria.
• A Z-Score below -2.0 indicates panic.

This example shows the Z-Score below the chart. The yellow lines indicate +2.0 and -2.0. The chart itself shows the 20-day (blue) and 100-day averages.

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The Z-Score signals for day traders

This strategy generates buy signals and short-sell signals.

A buy signal appears when...

1) The 100-day moving average is goes up.

2) The Z-Score falls below -2.0 and then rises back above -2.0.

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A short-sell signal appears when...

1) The 100-day moving average falls.

2) The Z-Score rises above +2.0 and then falls back below +2.0.

Protecting positions and taking profits

The exit logic is the key strength of this strategy. Open positions are managed by the ZScore_MeanReversion_Exit. This combines three intelligent elements:

NanoTrader can automatically place your target price and stop-loss orders. You can then adjust or cancel them.

The profit target

The profit target is based on mean reversion. The position is closed when the price reaches the 20-day moving average (blue line).

The stop-loss

Here, the trader has a choice. The stop-loss order can be placed based on the ATR (which measures the volatility of the share price) or on the lowest (highest) price of the candlestick in which the position was opened. The default setting is the ATR.

The time stop

If the price target is not reached after 20 candles (five hours on a 15-minute chart), this stop closes the position at the market price. This prevents positions that are not moving from tying up capital.

Tip: Traders can combine the stop loss with the price target and/or the time stop.

Examples

This example is a buy signal. The Z-Score falls into the panic zone below -2.0 and then rises back above -2.0. The 100-day trend (magenta line) is rising. The platform sets the stop-loss (red line). As expected, the price returns to the average price. The position is closed at a profit.

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This example is a short-sell signal. The Z-Score has risen into the euphoric zone above +2.0 and then falls back below +2.0. The 100-day trend is downwards. Unfortunately, this trader did not opt for a price-target exit. The position is closed after 20 candles (5 hours) by the time stop.

How to implement this free strategy

Follow these steps in the NanoTrader Full platform:

1. Open the chart of the instrument you want to trade.

2. Select the "WHS Z-Score Mean Reversion" strategy in the "WHS Strategies" folder.

3. Activate "TradeGuard+AutoOrder" in the chart to trade semi-automatically or "AutoOrder" to trade automatically.

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