Mean Reversion Z-Score Algorithm

Entry Logic

• Long entry triggers when 20-period Z-score of price crosses below -2.0.
• Short entry triggers when 20-period Z-score of price crosses above +2.0.
• Confirmation requires the entry candle to close with a body less than 50% of the total candle range.
• Timeframe is 5-minute chart.
• Location context requires price to be outside of the 20-period Keltner Channels.
• Market condition must be ranging, identified by an ADX value below 20.

Exit Logic

• Profit target is the 20-period exponential moving average (EMA).
• No scaling out. Full position is exited at the profit target.
• Trailing stop is not used for this strategy.
• Exit on signal failure if price moves 1 ATR against the position before reaching the target.
• Exit on opposite signal if a Z-score cross in the opposite direction occurs.
• Exit on time expiration after 60 minutes from entry.
• Exit on momentum loss if RSI(14) crosses below 40 for a long or above 60 for a short.

Stop Loss Structure

• Hard stop is placed 1.5 ATR from the entry price.
• Soft stop is a close beyond the entry candle's high/low.
• Maximum dollar loss is capped at $100 per trade.
• Maximum percent loss is 1% of account equity.
• Structural stop is placed above the recent swing high for shorts, or below the recent swing low for longs.

Risk Management Framework

• Risk per trade is 0.5% of account equity.
• Maximum daily loss limit is 2% of account equity.
• Maximum weekly loss limit is 5% of account equity.
• Maximum drawdown is 15% from peak equity.
• Risk-reward ratio requirement is a minimum of 1:1.5.

Position Sizing Model

• Sizing is based on a fixed fractional model.
• Volatility adjustment uses the 14-period ATR to normalize position size.
• Conviction sizing is not used; all signals are treated equally.
• No scaling in. Full position is taken at entry.
• No scaling out. Full position is exited at once.

Trade Filtering

• Avoid trading during major economic news releases.
• Only trade setups that form between 10:00 AM and 3:00 PM EST.
• Instruments must have a daily ATR of at least 1% of the instrument price.
• Avoid trading in markets with an ADX(14) above 25.
• Chop/news avoidance involves pausing trading 30 minutes before and after high-impact news.

Context Framework

• Trend direction is neutral or sideways.
• Price must be trading outside of its 20-period VWAP band.
• Price should be extended from the 50-period simple moving average (SMA).
• Location is near the upper or lower boundaries of a defined range.
• Higher timeframe alignment requires the daily chart to show a consolidation pattern.

Trade Management Rules

• Move stop to breakeven when the trade is 1R in profit.
• No scaling out.
• No adding to positions.
• Fast moves are faded; slow moves are entered on confirmation.

Time Rules

• Optimal trading window is from 10:00 AM to 11:30 AM EST.
• Avoid trading in the first 30 minutes of the session and the last hour.
• Session notes indicate higher probability during the London-New York overlap for forex pairs.

Setup Classification

• A+ setup: Z-score exceeds +/- 2.5 with divergence on the RSI.
• A setup: Z-score exceeds +/- 2.0 with confirming price action.
• B setup: Z-score exceeds +/- 1.5 at a key support/resistance level.
• C setup: Z-score signals without any other confirming factors.

Market Selection Criteria

• Instruments are major forex pairs or large-cap stocks.
• Minimum daily volume of 500,000 shares for stocks.
• Volatility should be in a consolidation phase, not expansion.

Statistical Edge Metrics

• Expected win rate is 65%.
• Average win is 1.2R.
• Average loss is 1R.
• Profit factor is 1.7.
• Expectancy per trade is +0.2R.

Failure Conditions

• Strategy fails in strongly trending markets.
• Avoid using during market-moving news events.
• A sudden increase in volatility will invalidate signals.

Psychological Rules

• Must have discipline to wait for the precise Z-score level.
• Avoid forcing trades when conditions are not met.
• Trust the statistical edge and do not deviate from the plan.

Advanced Components

• Market regime detection uses a 200-period SMA on the daily chart to identify the long-term trend.
• Volatility filter requires the VIX to be below 20.
• Correlation filter avoids taking trades on highly correlated assets simultaneously.
• Multi-timeframe alignment confirms the setup on the 15-minute chart.

Location

• Strongest at the boundaries of well-defined, multi-day trading ranges.
• Weakest during trend breakouts or news-driven volatility.
• Location relative to the weekly VWAP can alter the probability of success.