Z-Score Mean Reversion

Entry Logic

• Long Entry: Price reaches a Z-score of -2 or lower.
• Short Entry: Price reaches a Z-score of +2 or higher.
• Confirmation: Price starts to move back towards the mean.
• Timeframe: 15-minute.
• Location: Statistically significant deviation from the mean.
• Market Condition: Any.

Exit Logic

• Profit Target: A return to the mean (Z-score of 0).
• Scaling Out: Exit 50% at the mean, trail the rest.
• Trailing Stop: A moving average-based trail.
• Signal Failure: Exit if the Z-score exceeds +/- 3.
• Opposite Signal: Not applicable.
• Time Expiration: End of day.
• Momentum Loss: Exit if the reversion stalls.

Stop Loss Structure

• Hard Stop: A Z-score of +/- 3.
• Soft Stop: If price fails to revert within 3-4 bars.
• Max Dollar Loss: $1000.
• Max Percent Loss: 2%.
• Structural Stop: Not applicable.

Risk Management Framework

• Risk Per Trade: 1%.
• Daily Limit: 2 trades.
• Weekly Limit: 4%.
• Max Drawdown: 12%.
• R:R Requirement: 1.5:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: The Z-score itself is a volatility-adjusted measure.
• Conviction Sizing: Full size for all setups.
• Scaling In: No.
• Scaling Out: Yes.

Trade Filtering

• Market Conditions: Best in markets that are not experiencing a fundamental shift.
• Setups: Requires a clear statistical deviation.
• Instruments: Index futures, pairs trades.
• Time Restrictions: None.
• Chop/News Avoidance: The setup may be caused by news, but the statistical edge should still hold.

Context Framework

• Trend Direction: Counter-trend to the immediate move.
• VWAP Relationship: The move is likely far from VWAP.
• MA Relationship: The move is likely far from all MAs.
• Range Location: At an extreme.
• Higher TF Alignment: Not critical.

Trade Management Rules

• Breakeven: After a 1R move.
• Scale Out: At the mean.
• Add Size: No.
• Fast vs Slow Moves: Works for both.

Time Rules

• Optimal Window: Any.
• Times to Avoid: None.
• Session Notes: This is a quantitative, statistical approach to mean reversion.

Setup Classification

• A+ Setup: Z-score exceeds +/- 2.5.
• A Setup: Z-score exceeds +/- 2.
• B Setup: Z-score exceeds +/- 1.5.
• C Setup: Z-score is less than +/- 1.5.

Market Selection Criteria

• Instruments: ES, NQ, statistical arbitrage pairs.
• Volume: High.
• Volatility: Moderate to high.

Statistical Edge Metrics

• Win Rate: 70-80%.
• Avg Win: 1R.
• Avg Loss: 1R.
• Profit Factor: 2.3.
• Expectancy: +0.6R.

Failure Conditions

• Market Conditions: A "black swan" event that causes a permanent repricing.
• Specific Scenarios: A change in the statistical relationship between two assets in a pairs trade.

Psychological Rules

• Discipline: Must trust the statistics and be willing to take the trade even if it feels wrong.

Advanced Components

• Regime Detection: Use a rolling window to calculate the Z-score to adapt to changing market conditions.
• Filters: Only trade when the VIX is below a certain level.
• Correlation: The strategy can be used to trade the correlation between two assets.
• MTF Alignment: Not applicable.

Location

• Strongest: In markets that have a strong and stable statistical mean.
• Weakest: In markets that are undergoing a fundamental change.