Zero Lag MACD – Strategy, Rules, Settings, Returns

Zero Lag MACD – Strategy, Rules, Settings, Returns

Many indicators are available for tracking price movements, but one common feature among them is lagging significantly behind price action — one indicator that tries to solve this problem is the Zero Lag MACD. What do you know about the Zero Lag MACD?

The Zero Lag MACD is a type of MACD developed by John Ehlers and Rick Way to minimize the inherent lag seen in the traditional MACD indicator. Its MACD is calculated similarly to the classical one but uses zero-lag exponential moving averages. Designed to track the price more closely, the indicator gives a clearer view of the trend and short-term price movements.

In this post, we will take a look at most of the questions you may have about this indicator: what it is, how it works, and how you can improve your trading strategies with it. Keep reading!

Key takeaways

  • The Zero Lag MACD is a type of MACD developed by John Ehlers and Rick Way to minimize the inherent lag seen in the traditional MACD indicator.
  • Designed to track the price more closely, the indicator gives a clearer view of the trend and short-term price movements.
  • We show you a backtested trading strategy complete with trading rules and settings.
  • More trading indicators if you click here.

What is Zero Lag MACD?

Zero Lag MACD Key Information

The Zero Lag MACD is a type of MACD developed by John Ehlers and Rick Way to minimize the inherent lag seen in the traditional MACD indicator. Designed to track the price more closely, the indicator gives a clearer view of the trend and short-term price movements.

Its MACD is calculated in the same way as the classical one, but it uses de-lagged data, unlike the traditional MACD that uses regular data. The data is de-lagged by subtracting the data from the ‘lag’ experienced some n-period ago such that recent data are weighted positively while old data are weighted negatively.

As with the classical MACD, the zero-lag MACD can be used to track price trends and market momentum. The zero-lag MACD line crossing above the signal line signifies that the trend is up and the momentum is rising in the upward direction. On the other hand, the zero-lag MACD line crossing below the signal line indicates that the trend is downward, and the price momentum is rising to the downside. Compared to the traditional one, it is more sensitive to price movements as it uses a zero-lag concept to stay close to the price action.

Zero Lag MACD trading strategy – rules, settings, and returns

A backtested strategy is coming shortly.

How does Zero Lag MACD differ from traditional MACD?

The Zero Lag MACD differs from the traditional MACD in that it uses zero-lag exponential moving averages in calculating its MACD value. Both indicators use two exponential moving averages — 12-period and 26-period — and calculate their MACD values by subtracting the 26-period EMA from the 12-period EMA before using a 9-period EMA of the MACD to find the signal line. However, the zero-lag MACD applies non-lagging processes to the EMAs.

In essence, the zero-lag MACD is an improved version of the traditional MACD. It was created to remove the lag effect in the traditional indicator so as to make it more sensitive to price movements and trend changes. While both provide the same signals, the zero-lag version generates more timely signals.

Why use Zero Lag MACD in trading?

You use Zero Lag MACD in trading because it is an improved version of the traditional MACD indicator, offering far less lag and generating more timely signals. The zero-lag MACD tracks price movements more closely and offers its signals in time for you to enter a trade at an early period of the price action.

You can use it to identify market trends and, more specifically, the momentum of the trend. This is achieved by watching the direction of its signal line crossover and the crossover of the zero line (the centerline). With its divergence signals, you can anticipate price reversals.

Who developed Zero Lag MACD?

The Zero Lag MACD was developed by John Ehlers and Rick Way. They were looking for ways to remove the lag effect in the traditional MACD signals, so they started experimenting with the use of de-lagged data in calculating the exponential moving averages and the MACD. One of the ways they found was to de-lag the data by subtracting the data from the ‘lag’ experienced some n-period ago such that recent data are weighted positively while old data are weighted negatively.

What are the components of Zero Lag MACD?

The components of zero lag MACD are as follows:

  • Zero lag MACD line: This is the faster line in the Zero lag MACD. Generally, obtained by subtracting a long-period EMA from a short-period EMA after the de-lagging processes. The default settings for the long and short EMAs are 12 and 26 periods, but you set yours at any value that works best for the market you are trading.
  • Zero lag signal line: This is created by obtaining a 9-period EMA of the MACD values. It smoothens the MACD value without making the entire indicator lag significantly behind the price.

How is the Zero Lag MACD calculated?

Zero lag MACD is calculated from the basic MACD calculation but it involves very complex, multi-step processes to produce a de-lagged indicator. Here are the steps in the calculation using the default periods of 12, 26, and 9:

Step 1: Calculating the short-period Zerolag MA

EMAshort1 = 12-period exponential moving average of the close price

EMAshort2 = 12-period exponential moving average of EMAshort1

DifferenceShort = EMAshort1 – EMAshort2

ZeroLagShort = EMAshort1 + DifferenceShort

Step 2: Calculating the long-period Zerolag MA

EMAlong1 = 26-period exponential moving average of the close price

EMAlong2 = 26-period exponential moving average of (EMAlong1)

DifferenceLong = EMAlong1 – EMAlong2

ZeroLagLong = EMAlong1 + DifferenceLong

Step 3: Calculating the Zerolag MACD

Zero Lag MACD = ZeroLagShort – ZeroLagLong

Step 4: Calculating the Zerolag Signal line

Signal1 = 9-period Exponential moving average of (ZEROLAGMACD)

Signal2 = 9-period Exponential moving average of (Signal1)

DifferenceSignal = Signal1 – Signal2

Zero Lag Signal Line = Signal1 + DifferenceSignal

What are the advantages of Zero Lag MACD?

The advantages of Zero Lag MACD include:

  • It follows the price action closely, thereby reducing the lag effect in the traditional MACD.
  • It is more sensitive to price movements and, thus, signals price reversals and new trends in a more timely manner than the traditional indicator.
  • It responds faster to price changes.
  • It helps traders to make entry faster, almost in line with the price action.
  • As with the traditional indicator, signal crossovers show the direction of price momentum, while divergences may signal price reversals

Can Zero Lag MACD improve trading accuracy?

Yes, zero lag MACD can improve trading accuracy when the market is trending by reducing the indicator’s lag from the price action. Its sensitivity to price movements may allow traders to make an early entry into the market when their trading setups are present. However, the same improved sensitivity that makes it less lagging and more accurate also makes it more prone to whipsaws. So, when the market is moving sideways, it can become far less accurate than the traditional MACD. During such periods, it will generate more false signals, as the price swings about without a direction.

How does Zero Lag MACD reduce lag?

Zero lag MACD reduces lag by using complex processes to de-lag the data at every step of the calculation. The data is de-lagged by subtracting the data from the ‘lag’ experienced some n-period ago such that recent data are weighted positively while old data are weighted negatively.

While maintaining the general MACD calculation using two exponential moving averages of different periods, zero lag MACD finds the EMA of the EMAs before using the difference between the double-smoothened EMA and the original EMA to find the zero-lag EMA for the different periods. It is a complex process — the calculation steps above.

Is Zero Lag MACD suitable for day trading?

Yes, zero lag MACD can be suitable for day trading if used on the right timeframe for day trading and the trading strategy has a positive expectancy. To have an effective day trading, your trading strategy must be backtested and proven to have positive expectancy in the market you’re trading.

The right timeframes for day trading are usually the 1-hour, 30-minute, and 15-minute timeframes. The 5-minute timeframe may be too small to get a good view of the market structure, while a 4-hour timeframe may be too big to snipe the average daily price swings. To know the best timeframe for your trading strategy, backtest your system on different intraday trading timeframes to see the one that offers the best performance.

How can Zero Lag MACD signal trend reversals?

The Zero Lag MACD signals trend reversals via its divergence setups, especially when the form at the extreme levels of the indicator. Divergences are of different types, depending on the price swing direction before they are formed. When the price is moving downward and makes a lower low while the zero lag MACD makes a higher low, there is a bullish divergence, which means that the downward price trend is likely to reverse to the upside.

On the other hand, if the price is trending up and makes a higher high while the zero lag MACD makes a lower high, there is a bearish divergence, which means that the upward price trend is likely to reverse to the downside.

What are the best settings for Zero Lag MACD?

The best settings for Zero Lag MACD will depend on your trading strategy and the market you are trading. Generally, the default settings are 12 periods for the short-period EMA, 26 periods for the long-period EMA, and 9 periods for the signal line, but you can change the settings to what works best for your strategy and the market you are trading. The best way to know the best settings for you is to backtest your strategy using different settings and, then, evaluate the performances to find the settings that work best.

How to set up Zero Lag MACD in trading platforms?

To set up the Zero Lag MACD in trading platforms, you have to first check if the indicator is among the built-in indicators on the platforms you are working with. Most trading platforms come with pre-installed indicators, but it is unlikely that the zero lag MACD will be one of them. Most likely, you will have to get a custom-made zero-lag MACD for the trading platforms you are using and install it yourself. After the installation, go to the indicator section of the platforms to pick the indicator and attach it to your chart. When you do that, a box will appear for you to put your preferred settings.

Can Zero Lag MACD be used with other indicators?

Yes, the Zero Lag MACD be used with other indicators to improve the accuracy of its signals. To know the right indicators to combine with the zero lag MACD, you need to understand how the indicator works so you choose only indicators that complement it. Being a momentum indicator that can show price reversals, one of the best indicators to combine with it is the moving average indicator. The moving average can show the direction of the main trend, while you use the zero lag MACD to gauge the momentum of short-term price swings and find pullback reversals.

How to interpret Zero Lag MACD signals?

To interpret Zero Lag MACD signals, you have to focus on its two main signal generators:

  • Signal line crossover: This signifies a change in the momentum of the price. When the MACD line crosses above the Signal Line, it means that the momentum is in the upward direction. Likewise, when the MACD line crosses below the Signal Line, it means that the momentum is in the downward direction.
  • Divergences: These signal a potential trend reversal, at least in the short term. The price making a lower low when the zero lag MACD is making a higher low signal a bullish divergence, which means that the downward price trend is likely to reverse to the upside. Conversely, the price making a higher high when the zero lag MACD is making a lower high indicates a bearish divergence, which means that the upward price trend is likely to reverse to the downside.

What are common mistakes using Zero Lag MACD?

The common mistakes when using Zero Lag MACD include:

  • Using the indicator as if it is a standalone indicator
  • Not combining it with other analysis tools to have a better view of the market and make informed decisions.
  • Not having a reliable trading strategy with clear entry and exit criteria
  • Not following a risk management plan

How does Zero Lag MACD handle market volatility?

The Zero Lag MACD handles market volatility very poorly, as it is very sensitive to price changes and follows price movements very closely. When the market is very volatile, the price swings about very frequently without moving in any particular direction. Zero lag MACD also follows the price in such non-directional and erratic movements, thereby generating lots of false signals. The indicator is not suitable for highly volatile market conditions.

Can Zero Lag MACD be used for swing trading?

Yes, the Zero Lag MACD be used for swing trading if used on the right timeframe for swing trading and your trading strategy has a positive expectancy. The right timeframes for swing trading are usually the 4-hour and daily timeframes, but you may also step down to the hourly timeframe to pick better entries. To know the best timeframe for your swing trading and whether your strategy has a positive expectancy, backtest your system on different swing trading timeframes to see the one that offers the best performance.

What timeframes work best with Zero Lag MACD?

The timeframes that work best with Zero Lag MACD will depend on your trading style, the market you are trading, and your trading strategy. If you are a day trader, you may want to trade on the 1-hour, 30-minute, or 15-minute timeframe, as they offer the best view of the intraday market movements. A swing trader, on the other hand, may focus on the 4-hour or daily timeframe to have a broader, multi-day view of the market. To know the timeframe that works best for your trading style, you have to backtest your system on different trading timeframes that suit your trading style to see the one that offers the best performance.

How to backtest Zero Lag MACD strategies?

To backtest Zero Lag MACD strategies, follow these steps:

  1. Identify the markets you want to backest the strategies on.
  2. Gather the data you need.
  3. Divide the data into in-sample and out-of-sample data.
  4. Formulate the strategies you want to backtest and the parameters or settings you need to adjust.
  5. Code the strategies into trading algorithms.
  6. Run your backtesting on the in-sample data and optimize with the out-of-sample data, adjusting your parameters as needed.
  7. Evaluate the results of your backtesting.

What are successful Zero Lag MACD trading strategies?

These are a few successful Zero Lag MACD trading strategies:

Momentum strategy: This strategy tries to use the zero lag MACD to identify changes in market momentum and trade in the direction of the trend when the price momentum is in that direction. For instance, if a moving average or a trendline shows that the trend is up, you can go long when the Zero lag MACD line crosses above the Signal Line. See below:

Divergence strategy: This strategy aims to use the indicator’s divergence from price swings to find potential market reversals. A bullish reversal is when the price makes a lower low and the indicator makes a higher low. See below:

How does Zero Lag MACD perform in different markets?

How the Zero Lag MACD performs in different markets will depend on the market conditions. The indicator performs better in markets that are trending than in markets that are moving sideways. You have to backtest your strategy in the different markets you’re interested in to know the ones most suitable for the indicator.

Can Zero Lag MACD be used for cryptocurrency trading?

Yes, the Zero Lag MACD can be used for cryptocurrency trading, as long as the is trending in one direction. The indicator is price-based and can work in any market if the market is in a good trend. However, it performs poorly in markets that are moving sideways.

How to customize Zero Lag MACD for personal trading style?

To customize the Zero Lag MACD for personal trading style, you have to use the indicator, along with other indicators or analysis tools (such as candle patterns and trendlines), to create a robust trading strategy that has clear entry and exit criteria and a risk management plan. Next, you backtest the strategy to be sure it is profitable. You can then trade it manually or convert it to a trading algorithm for automated trading.

Are there any limitations of Zero Lag MACD?

Yes, there are some limitations of Zero Lag MACD. These are some of them:

  • The indicator performs poorly in volatile and non-trending markets, as it is highly sensitive to price changes.
  • It cannot be used as a standalone indicator due to frequent whipsaws and false signals.
  • It cannot anticipate changes in market conditions.

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