LeafAlgo

Normalized Z-Score

The Normalized Z-Score indicator is designed to help traders identify overbought or oversold conditions in a security's price. This indicator can provide valuable signals for potential buy or sell opportunities by analyzing price deviations from their average values.

How It Works:
-- Z-Score Calculation:
---- The indicator calculates the Z-Score for both high and low prices over a user-defined period (default is 14 periods).
---- The Z-Score measures how far a price deviates from its average in terms of standard deviations.

-- Average Z-Score:
---- The average Z-Score is derived by taking the mean of the high and low Z-Scores.

-- Normalization:
---- The average Z-Score is then normalized to a range between -1 and 1. This helps in standardizing the indicator's values, making it easier to interpret.

-- Signal Line:
---- A signal line, which is the simple moving average (SMA) of the normalized Z-Score, is calculated to smooth out the data and highlight trends.

-- Color-Coding:
---- The signal line changes color based on its value: green when it is positive (indicating a potential buy signal) and red when it is negative (indicating a potential sell signal). This coloration is also used for the candle/bar coloration.

How to Use It:
-- Adding the Indicator:
---- Add the Normalized Z-Score indicator to your TradingView chart. It will appear in a separate pane below the price chart.

-- Interpreting the Histogram:
---- The histogram represents the normalized Z-Score. High positive values suggest overbought conditions, while low negative values suggest oversold conditions.

-- Using the Signal Line:
---- The signal line helps to confirm the conditions indicated by the histogram. A green signal line suggests a potential buying opportunity, while a red signal line suggests a potential selling opportunity.

-- Adjusting the Period:
---- You can adjust the period for the Z-Score calculation to suit your trading strategy. The default period is 14, but you can change this based on your preference.

Example Scenario:
-- Overbought Condition: If the histogram shows a high positive value and the signal line is green, the security may be overbought. This could indicate that it is a good time to consider selling.
-- Oversold Condition: If the histogram shows a low negative value and the signal line is red, the security may be oversold. This could indicate that it is a good time to consider buying.

By using the Normalized Z-Score indicator, traders can gain insights into price deviations and potential market reversals, aiding in making more informed trading decisions.

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Open-source script

In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.

Disclaimer

The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.

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