Hi
Ive been looking at Z-Score in the “statistics of closed trades” dialog and am still not entirely sure whether high/low or close to zero is what I want?
I think… closer to zero means there is a lower liklihood of a streak / variance, which is good if you want a solid algo… but im really not sure.
Can someone shed any light please?
thanks
Sequence of losses/gains are random or not, the sign simply tells us whether the dependence is positive or negative, i.e. :
Negative Z-Score – the dependency is positive.
Positive Z-Score – the dependency is negative.
Positive dependence – a benefit will be followed by a benefit and a loss by a loss.
Negative dependence – a loss will be followed by a gain and a gain by a loss.
And how sure can we be that this will happen? That’s the percentage that you are told in the z-score value of your system. So, for example, if the z-score = 2.17 (97.0%), it means that there is a 97% confidence level that a loss will be followed by a profit and a profit by a loss (negative dependence). In this case, you would want to miss a trade after a profit and take a trade after a loss to maximize profits and minimize losses.
Thank you Nicolas, a few more questions if I may…
1. How do you calculate the value 97% from 2.17 z-score? What percentage is a 0 (zero) z-score for example? Is it 100% or 0%?
2. in terms of a “perfect” system, where would you want the z-score? I understand what you explained above, but if possible id like a target to aim for to add to other stats, like low drawdown for example.
3. over what period (i.e how long) would you expect be required to get an indicative z-score? Obviously the more the better, but in general – 3 months? 6 months? Etc. If not clear, just your best guess, or what period would you look for?
thanks!
I think I am almost there! Thank you..
so..for question 1. Does a ZScore of zero mean there is a 100% chance the next trade will go the other way? If so.. surely that just isn’t possible!
thanks!
to add.. if a z score of zero is not 100%, what would be? A score of 100?
Does anyone else know the answer to this?
thanks!
JSParticipant
Senior
Z-score is a tricky interpretation.
A winning system can have both a positief or negative Z-score.
When the Z-score is zero, all of your trades are winners because the total profit divided by your (winning) trades is the average profit (mean), so there is no deviation.
Example negative Z-score: if you have 6 trades and 1 is a big winner than your Z-score will be negative because the other 5 will be below your average profit (mean).
