today I came across the following analysis concept in Tradestation Labs:
Contrarian Z-Score By Alexandra Guevara | Market Technician, TradeStation Labs Summary
Standard deviation is a common statistical calculation that is often used in the world of finance to measure risk. The higher the standard deviation, the higher the overall risk or volatility. However, standard deviation can also be used as a basis for mean-reversion trading strategies.
In this Analysis Concepts paper, we will introduce a strategy and indicator that use standard deviation to calculate a z-score. A z-score is simply the number of standard deviations separating the current price from the mean price. The strategy then looks at the momentum of the average z-score and takes a contrarian approach to trading to generate buy and sell signals.
I am wondering whether anyone applies this or a similar concept? I am naturally a bit contrarian (for better or for worse) and so this concept somehow appeals to me. The worry, of course, is that building a system around this concept alone will kill you in strongly trending markets. So perhaps one would have to add some filters? Anyway, I'm still thinking about it and would like to hear others' comments and opinions.