Volume-Weighted Price Z-Score for Measuring Price Extremes

Summary

The indicator measures the current price’s distance from a volume-weighted moving average, then expresses that distance as a normalized score. It uses the logarithm of the price-to-average ratio and scales it by the historical standard deviation of that deviation. A simple moving average smooths the resulting score. The document also describes fallback behavior when volume or the calculated deviation is zero and gives example parameter presets for different trading horizons.

Readings around zero indicate price near its volume-weighted reference; values beyond ±1 or ±2.5 mark increasingly stretched conditions. The author presents extremes as possible reversal areas and zero crossings with rising volume as potential shifts in bias, while warning that the score is context rather than a standalone signal. The statistical rarity claims assume a normal distribution, an assumption not established with evidence here. No empirical performance results are provided, and strong trends can keep the score elevated for multiple bars.

Key ideas

• The indicator compares price with a volume-weighted moving average rather than an unweighted price average.
• Logarithmic deviation divided by its historical standard deviation produces a dimensionless score.
• Smoothing can reduce short-term noise but adds lag.
• Extreme readings may flag stretched conditions, but the document recommends confirmation from other market evidence.
• The interpretation of threshold rarity depends on a normal-distribution assumption.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.