Z-Score Indicator [mr2j]

kelmarin

This script calculates the Z-score over any lookback window. It provides an understanding if the current price is relatively high or low - and subsequently is close to a correction.

Z-scores can be broken down into probabilities, where Z-scores

Above 2 occurs 2.3% of the time (very uncommon) [RED ZONE]
Between 1 and 2 occurs 13.6% of the time (elevated) [ORANGE ZONE]
Between 0 and 1 occurs 34.1% of the time (normal) [GREEN ZONE]
Between -1 and 0 occurs 34.1% of the time (normal) [GREEN ZONE
Between -2 and -1 occurs 13.6% pf the time (elevated) [ORANGE ZONE]
Below -2 occurs 2.3% of the time (very uncommon) [RED ZONE]

So by paying attention to what zone price action currently is, we can make predictions about short time price corrections.

Normal zone - no assumptions can be made
Elevated zone - pay attention for further escalation
Very uncommon zone - expect price correction over the short term

Note. Price action is not normally distributed, and as such this indicator can not predict price action with any statistical certainty. It can however, serve as an indicator for upcoming price reversals.