In the process of releasing some of my Z-Score based indicators. This is the Z-Score Candle indicator.
What it does:
This converts the current candles into a z-score based candle over a 14 period lookback (adjustable but recommended to leave at 14). It plots out the overbought/oversold areas using colours and will lookback over a user defined period of time to identify previous areas of bullish and bearish reversals.
Why Z-Score Candles?
Before we get into how to use it, I think its important to discuss why converting candles to a Z-Score is advantageous. When we convert candlesticks to Z-Score, we have the ability to view areas of natural mathematical support and resistance (I want to clarify, when I saw mathematical support and resistance, it is kind of a misnomer, it is not the same as technical support and resistance. Its a measure of the natural tendency of things to revert to their mean and not deviate to extreme poles of their mean for prolonged period of time, I use the term mathematical support and resistance as it is something most traders are familiar with and operates similarly).
This is particularly helpful during trends. For example, if we take a look at the following BA chart:
In the chart above, you can see that despite BA not being on technical support (that red line), the indicator identified math support (the support was identified by the indicator looking at BA's natural deviations from its mean and seeing that, at that particular point in time, BA had deviated to an area that traditionally leads to reversals to the upside).
If we look at another example:
We can see in the chart above that, despite BA making a new high on the day and "breaking out" of previous resistance, BA was at math resistance being 3.0 Standard Deviations from its trading mean at the time. Thus, necessitating the pullback you see in the chart.
How to use it:
The indicator can be used similar to RSI and Stochastics or any other oscillator based indicator. The difference is, you can actually see the price action in terms of its relationship to its mean. What the means, is the indicator displays the current price action in terms of the ticker's relationship to its current mean and average. This permits us to see areas of rejection and support in relation to its current distance from neutrality. We can also see the various positions of each of the ticker's values from the mean. For example, we can see where the open is in relation to the average, the high and the low vs simply looking at a single variable (usually the close price).
The indicator will also highlight areas where the ticker has deviated to extreme ends of its mean (defined at a Z-Score of +/- 3.0). The picture below is an example of a bearish extreme:
And a bullish extreme:
You can see in both cases a reversal resulted almost immediately.
Inputs:
In the chart above, you can see the 3 main input sections.
Z-Score Lookback: This determines the lookback length for the Z-Score. The recommendation is to leave at 14, especially if you are a day trader.
SMA Inputs: The SMA (The white line) can be toggled off and on. You can also change the source to the High, Low, Close and Open Z-Score. You can adjust the lookback length of the SMA to your liking to assess trends. It does not need to be the same input as the Z-Score.
Reversal Inputs: The reversal inputs determines the length of lookback for the indicator to determine the most extreme bearish and bullish deviation from its mean. It is defaulted at 75 but can be adjusted based on preference. For more frequent signals, you can reduce the lookback length but be prepared for false signals in that case. You can also toggle off the reversal labels if you do not want them.
Concluding remarks:
And that is the Z-Score Candle indicator in a nutshell. Pretty self explanatory otherwise. It is more tailored to day traders. It is not a tool I would necessarily use for longer-term outlooks. I would use a simple Z-Score based indicator for that. But for active day trading, this is very helpful. That said, it can be used to look at longer term outlooks as well, but there are more powerful Z-Score based indicators for that (you can check out my own Z-Score indicator or my recently released Z-Score Probability Indicator which is more tailored for bigger picture outlooks).
Hope you enjoy, as always leave your comments, suggestions and questions below!
I've seen many indicators, tried several, and faced losses. However, this one shows promise; it operates on a high-low concept. Great effort and work, sir. Thank you for this creation. And How can I follow you on social media to receive updates on your releases for your followers?
leebertfx
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Brilliant work. Have you ever tried running a Z-Score on the spread of 3 correlated pair? I'm thinking it might illuminate some interesting tradeable relationships. Example...GBPUSD, EURUSD, USDCHF. The idea is that the Z-Score of the positively correlated relationship between the GBPUSD/EURUSD and negatively correlated relationship between the USDCHF/EURUSD will highlight an unseen, yet strong, temporary price imbalance that can be traded. Simply, if the EURUSD spread pulls away from both the GBPUSD and the USDCHF, then we should have a meaningful and irrational price divergence that will be soon corrected.
Steversteves
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@leebertfx, Interesting idea that I will look into. The only thing I have that is somewhat similar is my VIX Oscillator which takes the Z-Score of the VIX and puts it against the Z-Score of whatever ticker you are on currently. But it is theroetically possible to have an indicator that allows manual input of other tickers to do what you are suggesting.
krishina
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I have one more question, please sir.
When translating your script into my language, some things are unclear. Does "Predicted Bearish Reversal" mean that after a rally the price may fall (reversal from a bullish to lower)?
Steversteves
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@krishina, It reads "Previous" not predicted. It just means that the area is similar to other areas where price reversed in the opposite direction. So if it says bullish, it means that the stock has reversed in the bullish direction in similar circumstances, vice versa for bearish.
The indicator looks amazing, it has a very interesting theoretical foundation! I will test the practical performance of the tool!
lukricky
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what is the exact meaning of previous bear/bull reversal ? does it mean the coming will become BULL , if the previous shows that it is Previous BEAR ??
Steversteves
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@lukricky, Great question! It just means that, mathematically, the current deviation from the mean is similar to the last time a bear or bull reversal happened. It is persuasive but not definitive :-)/