5. Mean Reversion Across Markets — VWAP + Z-Score Playbook
Overview
Mean reversion works when price deviates from “fair value” and snaps back. You need two definitions:
-
what fair value is
-
what “extreme” means
This playbook uses VWAP as the anchor and Z-score as the standardized deviation.
Core Concepts
VWAP as Fair Value
VWAP often behaves like a magnet in non-trending markets—especially intraday.
Z-Score as “How Extreme”
Z = (Close − MA(N)) / StdDev(N)
Common N: 20
Z = −2 means price is 2 standard deviations below its mean.
Trend Filter (Avoid Trend Acceleration)
Mean reversion fails most in strong trends. Use:
-
ADX(14) < 20 as the allowed condition
Entry Rules
Long Setup
-
Price below VWAP
-
Z < −2.0
-
Confirmation: higher close than prior bar
Short Setup
-
Price above VWAP
-
Z > +2.0
-
Confirmation: lower close than prior bar
Exits
-
Exit when price returns to VWAP
-
Or exit when Z returns near 0 (e.g., −0.2 to +0.2)
-
Optional partial when Z improves to −1 (longs) / +1 (shorts)
Stops & Sizing
-
Stops: 1.8–2.0 × ATR(14)
-
Risk a fixed % per trade for consistency across assets
How to Use This in TradeOS
-
Set this up as a VWAP + Z-score checklist in TradeOS so you can apply the same mean reversion logic across markets without rethinking the rules each time.