ZRatio


ZRatio

The Z-Ratio is the result of a Z Test of Statistical Significance.  While the number does not identify how much better than random the trades produced from the strategy are (i.e. importance), the Z-Ratio is helpful in identifying whether the trades are significantly different (i.e. better) than trades produced randomly for the same period.  The higher the Z-Ratio, the lower the probability that the trades were produced by random chance.  Statisticians often use 3 critical ratios to determine statistical significance.  These are:


Alpha Level

Critical Ratio

.05

1.64

.01

2.33

.001

3.09


If the Z-Ratio is greater than 2.33, then the trades can be said to be statistically significant at the alpha level of .01.  This means that there is only a 1% probability that the trades were produced by random chance.  If the Z-Ratio exceeds 3.09, there is only a 0.1% chance that the trades were produced by random chance.  On the other hand, if the Z-Ratio were less than 1.64, most statisticians would assume the probability is too high that the trades were produced randomly, and would therefore consider the results statistically insignificant.


Note 1: A negative Z-Ratio indicates the average trade selected randomly had a higher return than the average trade produced from the strategy.


Note 2: Since a different sampling of random trades is produced for comparison each time the strategy is run, the Z-Ratio may differ slightly between runs.