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ZScore Reversal Strategy

The ZScore Reversal strategy measures how far price deviates from a moving average in terms of standard deviations. The resulting Z-Score highlights statistically stretched conditions that may snap back toward the mean.

Testing indicates an average annual return of about 91%. It performs best in the stocks market.

A trade is opened long when the Z-Score falls below a negative threshold, signalling an oversold market. A short trade is taken when the Z-Score rises above the positive threshold. The position is closed once the Z-Score crosses back through zero, indicating price has normalized.

This technique is attractive for mean reversion traders who prefer objective entry levels. The stop-loss percentage keeps adverse moves manageable while waiting for the reversion.

Details

  • Entry Criteria:
    • Long: Z-Score < -Threshold
    • Short: Z-Score > Threshold
  • Long/Short: Both sides.
  • Exit Criteria:
    • Long: Exit when Z-Score crosses above 0
    • Short: Exit when Z-Score crosses below 0
  • Stops: Yes, percent stop-loss.
  • Default Values:
    • LookbackPeriod = 20
    • ZScoreThreshold = 2.0m
    • StopLossPercent = 2m
    • CandleType = TimeSpan.FromMinutes(10)
  • Filters:
    • Category: Mean Reversion
    • Direction: Both
    • Indicators: Z-Score
    • Stops: Yes
    • Complexity: Intermediate
    • Timeframe: Intraday
    • Seasonality: No
    • Neural networks: No
    • Divergence: No
    • Risk Level: Medium
using System;
using System.Linq;
using System.Collections.Generic;

using Ecng.Common;
using Ecng.Collections;
using Ecng.Serialization;

using StockSharp.Algo.Indicators;
using StockSharp.Algo.Strategies;
using StockSharp.BusinessEntities;
using StockSharp.Messages;

namespace StockSharp.Samples.Strategies;
	
/// <summary>
/// Strategy that trades based on Z-Score (normalized price deviation from the mean).
/// Enters long when Z-Score is below a negative threshold (price significantly below mean).
/// Enters short when Z-Score is above a positive threshold (price significantly above mean).
/// Exits when Z-Score returns to zero (price returns to mean).
/// </summary>
public class ZScoreReversalStrategy : Strategy
{
	private readonly StrategyParam<int> _lookbackPeriod;
	private readonly StrategyParam<decimal> _zScoreThreshold;
	private readonly StrategyParam<decimal> _stopLossPercent;
	private readonly StrategyParam<DataType> _candleType;
	
	private SimpleMovingAverage _ma;
	private StandardDeviation _stdDev;
	
	private decimal _lastZScore;
	
	/// <summary>
	/// Period for calculating mean and standard deviation.
	/// </summary>
	public int LookbackPeriod
	{
		get => _lookbackPeriod.Value;
		set => _lookbackPeriod.Value = value;
	}
	
	/// <summary>
	/// Z-Score threshold for entry signals.
	/// </summary>
	public decimal ZScoreThreshold
	{
		get => _zScoreThreshold.Value;
		set => _zScoreThreshold.Value = value;
	}
	
	/// <summary>
	/// Stop-loss percentage parameter.
	/// </summary>
	public decimal StopLossPercent
	{
		get => _stopLossPercent.Value;
		set => _stopLossPercent.Value = value;
	}
	
	/// <summary>
	/// Candle type parameter.
	/// </summary>
	public DataType CandleType
	{
		get => _candleType.Value;
		set => _candleType.Value = value;
	}
	
	/// <summary>
	/// Constructor.
	/// </summary>
	public ZScoreReversalStrategy()
	{
		_lookbackPeriod = Param(nameof(LookbackPeriod), 20)
			.SetGreaterThanZero()
			.SetDisplay("Lookback Period", "Period for calculating mean and standard deviation", "Parameters")
			
			.SetOptimize(10, 40, 5);
			
		_zScoreThreshold = Param(nameof(ZScoreThreshold), 2.0m)
			.SetGreaterThanZero()
			.SetDisplay("Z-Score Threshold", "Z-Score threshold for entry signals", "Parameters")
			
			.SetOptimize(1.5m, 3.0m, 0.5m);
			
		_stopLossPercent = Param(nameof(StopLossPercent), 2m)
			.SetGreaterThanZero()
			.SetDisplay("Stop-loss %", "Stop-loss as percentage of entry price", "Risk Management")
			
			.SetOptimize(1m, 3m, 0.5m);
			
		_candleType = Param(nameof(CandleType), TimeSpan.FromMinutes(10).TimeFrame())
			.SetDisplay("Candle Type", "Type of candles to use", "General");
	}
	
	/// <inheritdoc />
	public override IEnumerable<(Security sec, DataType dt)> GetWorkingSecurities()
	{
		return [(Security, CandleType)];
	}
	
	/// <inheritdoc />
	protected override void OnReseted()
	{
		base.OnReseted();

		_ma = null;
		_stdDev = null;
		_lastZScore = default;
	}

	/// <inheritdoc />
	protected override void OnStarted2(DateTime time)
	{
		base.OnStarted2(time);

// Initialize indicators
		_ma = new() { Length = LookbackPeriod };
		_stdDev = new() { Length = LookbackPeriod };
		
		// Create candles subscription
		var subscription = SubscribeCandles(CandleType);
		
		// Bind indicators to subscription
		subscription
			.Bind(_ma, _stdDev, ProcessCandle)
			.Start();
		
		// Enable position protection with stop-loss
		StartProtection(
			takeProfit: new Unit(0, UnitTypes.Absolute), // No take-profit
			stopLoss: new Unit(StopLossPercent, UnitTypes.Percent) // Stop-loss as percentage
		);
		
		// Setup chart if available
		var area = CreateChartArea();
		if (area != null)
		{
			DrawCandles(area, subscription);
			DrawIndicator(area, _ma);
			DrawOwnTrades(area);
		}
	}
	
	private void ProcessCandle(ICandleMessage candle, decimal maValue, decimal stdDevValue)
	{
		// Skip unfinished candles
		if (candle.State != CandleStates.Finished)
			return;

		// Skip if strategy is not ready to trade
		if (!IsFormedAndOnlineAndAllowTrading())
			return;
		
		// Skip if standard deviation is zero (avoid division by zero)
		if (stdDevValue == 0)
			return;

		// Calculate Z-Score: (Price - Mean) / StdDev
		decimal zScore = (candle.ClosePrice - maValue) / stdDevValue;
		
		LogInfo($"Current Z-Score: {zScore:F4}, Mean: {maValue:F4}, StdDev: {stdDevValue:F4}");
		
		// Trading logic
		if (zScore < -ZScoreThreshold)
		{
			// Long signal: Z-Score is below negative threshold
			if (Position <= 0)
			{
				BuyMarket(Volume + Math.Abs(Position));
				LogInfo($"Long Entry: Z-Score({zScore:F4}) < -{ZScoreThreshold:F4}");
			}
		}
		else if (zScore > ZScoreThreshold)
		{
			// Short signal: Z-Score is above positive threshold
			if (Position >= 0)
			{
				SellMarket(Volume + Math.Abs(Position));
				LogInfo($"Short Entry: Z-Score({zScore:F4}) > {ZScoreThreshold:F4}");
			}
		}
		else if ((zScore > 0 && Position > 0) || (zScore < 0 && Position < 0))
		{
			// Exit signals: Z-Score crossed zero line
			if (Position > 0 && _lastZScore < 0 && zScore > 0)
			{
				SellMarket(Math.Abs(Position));
				LogInfo($"Exit Long: Z-Score crossed zero from negative to positive");
			}
			else if (Position < 0 && _lastZScore > 0 && zScore < 0)
			{
				BuyMarket(Math.Abs(Position));
				LogInfo($"Exit Short: Z-Score crossed zero from positive to negative");
			}
		}
		
		// Store current Z-Score for next calculation
		_lastZScore = zScore;
	}
}