Z-Scores

Z-scores enable us to flag potential break-out conditions on all elements of our investment universe and to evaluate the momentum of a wide range of assets with very different volatilities. 

 

Z-score=(current price- 20dMa price)/ STD20d annualized

 

When the Z-score trades above 2 (i.e. 2 std above its mean) or under -2 (2std above its mean), the underlying asset is deemed to be in break up or down conditions. 

 

Z-scores can be used in conjunction with RSI's which will give a similar signal when the RSI trades above 70 or under 30. Both measures are indicators of momentum.

 

Tradeable "breakout" opportunities can arise for assets of low and high volatility alike. They can be accompanied or faded depending on circumstances.