What is Z-Score?

Z-Score is a statistical measurement used to evaluate a specific data point in relation to the average of other values within a particular set or population. By using Z-Score, traders can identify whether a particular value or stock is typical or atypical in comparison to a mean. It is a useful tool to identify correlations between different trades, trading positions, and strategies.

Often referred to as standard score, Z-Score is calculated as the number of standard deviations away from the mean of a set of data. It is expressed in negative or positive numbers (depending on whether the data point is above or below the mean) and measured in units of standard deviation from the mean. Typically, a Z-Score from 0 to 3 implies that a value is trading three standard deviations away from the mean, with a score of -3.0 to 3.0 showing that the value is within three standard deviations of the mean.

For example, you might use Z-Score to determine whether a stock is performing above or below average within a certain sector of the market. A Z-Score of -1.5 to 0.5 would suggest that the stock is trading within the average range, while a score of 1.5 to 3.0 represents an atypical performance falling within three standard deviations and may be a signal to initiate further investigations.

Z-Score is a powerful tool used by traders to help identify correlations between different trades and evaluate overall trading strategies and their potential success. By determining whether a stock or value is typical or atypical in comparison to the mean, traders can make better informed decisions about their trade entries, exits, and overall strategies. Additionally, Z-Score can be used to help analyze the risk associated with any given strategy. As such, understanding and effectively leveraging Z-Score is essential for anyone trading in the financial markets.