Z distance from VWAP

The Z distance from VWAP indicator calculates the normalized distance of price from the Volume Weighted Average Price (VWAP) to identify mean reversion opportunities and extreme market conditions.

Usage

The Z distance from VWAP is primarily used as a mean reversion oscillator to identify potential turning points in the market. Traders look for the following signals:

• Overbought (OB) Conditions: When the Z-score value enters the upper shaded red zone (defined by OB High and OB Low), the price is significantly extended above its volume-weighted mean, suggesting a potential pullback or reversal.
• Oversold (OS) Conditions: When the value enters the lower shaded green zone (defined by OS High and OS Low), the price is significantly below its volume-weighted mean, suggesting a potential bounce or recovery.
• Mean Reversion: The zero line represents the volume-weighted average price itself. Moves back toward the centerline from extreme levels indicate a return to the mean.
• Trend Strength: Values sustained above or below the dashed lines at +/- 1 can indicate the presence of a strong trend rather than an immediate reversal.

Details

The indicator functions similarly to a standard Z-Score but incorporates volume into the calculation. It first determines the volume-weighted mean over a specified lookback period. It then calculates the standard deviation of the price relative to this volume-weighted mean.

By dividing the current price's deviation from the mean by the standard deviation, it produces a normalized value. This allows for a consistent comparison of price distance across different symbols and timeframes, as the output is measured in units of standard deviation.

Settings

• Length: The lookback period used for calculating the volume-weighted mean and the standard deviation.
• OB High: The upper boundary of the overbought zone (typically 2.5).
• OB Low: The lower boundary of the overbought zone (typically 2.0).
• OS High: The upper boundary of the oversold zone (typically -2.5).
• OS Low: The lower boundary of the oversold zone (typically -2.0).

FAQ

How do I interpret the zero line?

The zero line represents the current Volume Weighted Average Price (VWAP) for the selected period. When the indicator is at zero, the price is exactly at its volume-weighted mean.

What is the difference between this and a standard Z-Score?

Standard Z-Score indicators typically use a simple moving average (SMA). This version uses volume in its mean calculation, making it more sensitive to price levels where high trading activity occurred.

How can I access this indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.