The Z-Score indicator is used in statistics to determine how far a data element is from the mean.
68% of a given dataset will be 1 standard deviation from the mean or +-1 from the mean. 94% of a given dataset will be +-2 standard deviations from the mean.
This would tell us that if a value in a sample (stock price in for this discussion) is beyond +-2 standard deviations from the mean it would be considered an anomaly or to use other stock technical analysis terms overbought or oversold. This would also tell use that typically 68% of the data should fall within +-1 standard deviation from the mean, in other words moving beyond +-1 standard deviation can prove to be the acceleration of a trend (or jump in price) that may soon reverse.
One of the best uses for Z-Score (as with other Oscillators such as RSI or Momentum) is to watch for divergence between price and the indicator. The stock chart of Microsoft below shows that when the price reached a lower low but Z-Score was trending up (higher low) it was a good indication that the stock price may start to move up.
How to Plot: Select the Z-Score indicator from the drop down box as shown below. Enter the number of days in the parameter box to the right of the indicator.
How To Use: Use the Z-Score indicator with indicators such as Momentum and RSI to confirm the turning point in stock prices based on a +-1 or +-2 standard deviations.
If you are an AMIBroker user you can download this formula from the AMIBroker site.