Profiting from the Z-Score by Mike DeAmicis-Roberts
What is the Z-score? You can use it to identify the types of winning and losing streaks in a trading system. Once the nature of the streaks are determined, then you can use different money management approaches to maximize profitability.
When traders analyze the results of their systems, they frequently look to the percentage of winners as proof of the systemís reliability. In many cases, this is a good indication. However, looking at the percentage of winners and losers only tells part of the story. Sometimes winning trades come in streaks. The trader who learns to exploit these streaks can maximize a systemís profitability.
When a trader views the percentage of winners, he assumes that all the trades in a sample happened independently of each other ó that is, the outcome of one trade did not affect the outcome of other trades. A good example of such an independent relationship between examples would be a coin toss. If you flip a coin, there is a 50% chance you will get heads, regardless of the result of the last coin toss. For independent situations, however, past events do not affect the probability of current events.