Z-Score

A z-score indicates how many standard deviations an element is from the mean of a distribution. In financial trading, it is frequently used for mean reversion strategies.

If the price of an asset deviates significantly from its historical mean, as measured by a high z-score, a trader might bet that the price will return to the mean. It helps in identifying overbought or oversold conditions in a systematic way.

By setting thresholds for the z-score, traders can automate their entry and exit points. It is a simple yet effective tool for quantifying relative price levels.

The z-score provides a standardized way to compare different assets or time periods. It is a staple in the repertoire of systematic and quantitative traders.