@R_Sawkar Good that you asked so that I can provide an explanation.
In our strategy Z-score is not used to determine over bought or over sold condition. We use it for ranking purposes. As you know our main factor is momentum ratio, that is combination of price action and volatility. We are using two look back periods of 1y and 6m. We use equal weightage factors (though we could use different weightage), that is basically same as finding average of the two.
If the performance of the universe for different time periods is vastly different, finding average might not be a good solution. Instead by using Z-score, we are looking at the position of the scrip in the universe. We calculate Z-score on the momentum ratio and that is used for ranking.
When we calculate the average, we don’t calculate it on momentum ratio (that is the base factor on which ranking is done), but by using Z-score on momentum ratio.
Therefore, we don’t look at absolute numbers, but use Z-score in ranking our scrips for selection.
If you use one look back only, like 1y or 6m, you can do it just on momentum ratio and will not need to calculate Z-score.
PS: Another point you will notice is that all momentum stocks will have an RSI score of over 70, ie over bought condition. That is why we do not use this parameter to determine entry of stocks in our pf.
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