Z-Score Trading

Z-score trading is a quantitative strategy that uses the Z-score, a statistical measure, to determine how far an asset's price is from its mean in terms of standard deviations. A Z-score of zero indicates the price is exactly at the mean.

A positive Z-score indicates the price is above the mean, while a negative Z-score indicates it is below. Traders use this to identify statistically significant deviations that may present mean reversion opportunities.

If the Z-score reaches a certain threshold, such as two or three standard deviations, the trader might take a position expecting the price to return toward the mean. This approach is highly objective and removes emotional bias from trading decisions.

It is widely used in algorithmic trading and systematic strategies. It requires a clear understanding of the statistical properties of the asset's price series.