Zero Lag Stochastic – Strategy And Rules

As traders, we rely on technical indicators and other analysis tools to study price movements and gain meaningful insights into the price action — one interesting indicator for tracking price swings is the zero-lag stochastic. What do you know about the indicator?

Zero Lag Stochastic is a type of stochastic indicator designed to track the price more closely and minimize the lagging feature seen in the traditional stochastic oscillator. The indicator gives a direct assessment of the momentum of short-term price movements. As with the traditional stochastic, it shows overbought/oversold conditions and generates signal line crossover and divergence signals.

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. Read on!

Key takeaways

• Zero-Lag Stochastic is designed to track the price more closely and minimize the lagging feature seen in the traditional stochastic oscillator.
• it uses a ratio of several stochastics with different periods %К, deceleration, and weights to apply the zero-lag feature. Thus, it follows the price swings more closely than the traditional stochastic oscillator.
• More trading indicators if you click here.

What is Zero Lag Stochastic?

The Zero-Lag Stochastic is a type of stochastic indicator designed to track the price more closely and minimize the lagging feature seen in the traditional stochastic oscillator. The indicator gives a direct assessment of the momentum of short-term price movements and can be used to identify potential market reversals.

It uses a similar calculation as the traditional one but to make the indicator non-lagging, it uses a ratio of several stochastics with different periods %К, deceleration, and weights to apply the zero-lag feature. Thus, it follows the price swings more closely than the traditional stochastic oscillator.

As with the traditional version, the zero-lag stochastic shows overbought/oversold conditions and generates signal line crossover and divergence signals. When the indicator rises above the 80 level, the market is said to be overbought, and when it falls below the 20 level, the market is said to be oversold. The zero-lag stochastic line crossing above the signal line indicates a rising momentum to the upside while crossing below the signal line implies a rising downside momentum. Divergences signal potential price reversals.

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

A backtested strategy is coming shortly.

How does Zero Lag Stochastic differ from traditional Stochastic?

The zero-lag stochastic differs from the traditional stochastic in that the former tracks price swings more closely than the latter, thereby eliminating any lag between the indicator and the price action. Both indicators use the basic calculation of stochastic, which involves assessing the level of the current price in relation to the price range over a chosen period (the %K) and smoothening the result to find the %D.

However, the zero-lag stochastic goes further to de-lag the indicator by finding a ratio of several stochastics with different periods %К, deceleration, and weights. The indicator’s calculation is complex and has 31 input parameters involving 5 different stochastics with different periods.

Why is Zero Lag Stochastic important for traders?

Zero Lag Stochastic is important for traders because it gives a direct assessment of the momentum of short-term price movements and can be used to identify potential market reversals. Unlike the traditional stochastic, it follows the price swings closely and, thus, eliminates the lag issues in the traditional indicator.

Traders can use the zero-lag stochastic to identify overbought and oversold conditions in the market, as well as know how much momentum a price move has and when the momentum is dying out. The indicator’s divergences from price swings can be used to anticipate potential market reversals, at least in the short term.

What are the main components of Zero Lag Stochastic?

The main components of Zero Lag Stochastic that are inputted for all the five stochastic that make up the indicator are as follows:

• The %K: This refers to the position of the current price relative to the price range over a chosen period (n). For each of the component stochastic, the %K is given as: %K = 100 x [(Price – Low_n)/(High_n – Low_n)]
• The %D: This is an n-period moving average of the %K for each component stochastic.
• The Slowing: This is the rate of deceleration of the component stochastics. It is an n-period smoothening of the %D.
• The Method: This refers to the type of moving average method employed in the smoothening.
• The Price field: This refers to the price data used — close, open, low, high, or typical price (the average of the close, low, and high).
• The Weight: This refers to the weighting applied to the component stochastics.

How is Zero Lag Stochastic calculated?

The calculation of the Zero Lag Stochastic is very complex and involves obtaining the ratio of five different stochastics with different periods %К, deceleration, and weights. Here’s how an MQL5 developer calculated it:

The following stochastic data are inputted for each of the five individual stochastics used in the zero-lag stochastic calculation:

• %K line period
• %D line period
• The Slowing or deceleration of the stochastic
• The stochastic averaging method.
• The price field or type of price data used
• The weight of the stochastic value

Also, the Smoothening period for the zero-lag stochastic is selected.

Then, the zero-lag stochastic K and D are calculated as follows:

K = (S1 + S2 + S3 + S4 + S5) / SumWeight

D = (K / Smoothing) + PrevD * (Smoothing-1) / Smoothing

Where:

S1 = Stochastic 1 (%K period, 1 %D period, 1 Slowing, 1 Method, 1 Price field)

S2 = Stochastic 2 (%K period, 2 %D period, 2 Slowing, 2 Method, 2 Price field)

S3 = Stochastic 3 (%K period, 3 %D period, 3 Slowing, 3 Method, 3 Price field)

S4 = Stochastic 4 (%K period, 4 %D period, 4 Slowing, 4 Method, 4 Price field)

S5 = Stochastic 5 (%K period, 5 %D period, 5 Slowing, 5 Method, 5 Price field)

SumWeight = 1 Weight + 2 Weight + 3 Weight + 4 Weight + 5 Weight

PrevD = Previous D value

What timeframes work best with Zero Lag Stochastic?

The timeframes that work best with Zero Lag stochastic will depend on your trading style and the market you are trading. If you are a day trader, the suitable timeframe options are the 1-hour, 30-minute, and 15-minute timeframes because they offer the best view of the intraday market movements.

On the other hand, if you are a swing trader, you 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 strategy on the different timeframe options for your trading style to see the one that offers the best performance.

How can Zero Lag Stochastic improve trading accuracy?

The zero-lag stochastic can improve trading accuracy by reducing the indicator’s lag from the price action. It is more sensitive to price movements, which allows traders to make an early entry into the market when their trading setups are present. On the flip side, the same improved sensitivity that ensures the zero-lag feature also makes it more prone to whipsaws. So, when the market is moving sideways, it can become far less accurate than the traditional stochastic, as it will generate more false signals when the price swings about without a direction.

What are the advantages of using Zero Lag Stochastic?

The advantages of Zero Lag stochastic include:

• As with the traditional stochastic, it shows overbought/oversold market conditions, with signal crossovers indicating the direction of price momentum and divergences signaling price reversals
• It follows the price action closely, which reduces the lag effect in the traditional stochastic.
• It is more sensitive to price movements and, thus, signals price reversals and changing momentum earlier than the traditional indicator.
• It responds faster to price changes.
• It helps traders to make entry faster, almost in line with the price action.

Are there any disadvantages of Zero Lag Stochastic?

Yes, there are some disadvantages of zero lag stochastic. These are some of them:

• The indicator doesn’t show the direction of the main trend.
• It could be prone to whipsaws, especially when the market is very volatile and moving sideways.
• It cannot anticipate such changes in market conditions so that traders can modify how they use it.
• It relies on other indicators or analysis tools to generate reliable signals.
• It gives a lot of false signals when used alone.

How do I set up Zero Lag Stochastic on my chart?

To set up the Zero Lag stochastic on your chart, you have to first check if the indicator is among the built-in indicators on the trading platform you are using. While most trading platforms come with pre-installed indicators, it is unlikely that the zero lag stochastic will be one of them. So, you will have to get a custom-made zero lag stochastic for the trading platform you are using and install it yourself. After that, go to the indicator section of the platform, double-click on the indicator, and drag it to your chart. A box will appear for you to put your preferred settings.

What are the common signals of Zero Lag Stochastic?

The common signals of Zero Lag Stochastic include:

• Overbought/oversold conditions, which show when the indicator is at extreme levels.
• Signal line crossover, which indicates a change in price momentum
• Divergence signals, which could signal a potential price reversal.

How do I interpret Zero Lag Stochastic signals?

To interpret the zero-lag stochastic signals, look for these:

• Overbought/oversold conditions: The market is said to be overbought when the indicator is above the 80% level and oversold when the indicator is below the 20% level.
• Signal line crossover: When the indicator is at extreme levels, a signal line crossover indicates a change in price momentum — at low levels, an upward signal line crossover indicates a change to bullish momentum, while at high levels, a downward signal line crossover indicates a change to bearish momentum.
• Divergence signals: When the price is making a lower low but the zero lag stochastic is making a higher low, there is a bullish divergence, which means that the downward price trend is likely to reverse to the upside. Likewise, when the price is making a higher high but the zero lag stochastic is making a lower high, there is a bearish divergence, which means that the upward price trend is likely to reverse to the downside.

Can Zero Lag Stochastic be used for day trading?

Yes, the zero-lag stochastic can be used for day trading if applied on the right timeframe for day trading and with a profitable trading strategy. The right timeframes for day trading can be either the 1-hour, 30-minute, or 15-minute timeframe. You have to backtest your strategy on the different intraday trading timeframes to see the one that offers the best performance. Be sure that the strategy is proven to have positive expectancy in the market you’re trading.

Is Zero Lag Stochastic effective for swing trading?

Yes, the zero-lag stochastic be effective for swing trading if used with the right strategy and on the right timeframe for swing trading. The right timeframes for swing trading are usually the 4-hour and daily timeframes, but the hourly timeframe may also be good for picking better entries. To know the best timeframe for your swing trading, backtest your strategy on the different swing trading timeframes to see the one that offers the best performance. Your strategy must have a positive expectancy.

How does Zero Lag Stochastic compare to other indicators?

In comparison to other indicators, the zero-lag stochastic is very useful in markets that are trending nicely with clear and simple pullbacks. In such market conditions, you need an indicator that does not lag to put you in the market early enough when a pullback reverses to continue the trend. That is where the zero-lag stochastic performs better than the traditional stochastic or the RSI.

Can Zero Lag Stochastic be combined with other indicators?

Yes, the Zero Lag Stochastic be combined with other indicators to improve the accuracy of its signals. To know the right indicators to use with the zero-lag stochastic, you have to understand how the indicator works so you choose only indicators that complement it. Since it is a momentum indicator that can show pullback reversals, one of the best indicators to combine with it is the moving average indicator, which can show the direction of the main trend.

What are the best settings for Zero Lag Stochastic?

The best settings for the Zero Lag Stochastic depend on the market you are trading and the results of your backtesting. The indicator’s settings have up to 31 input parameters, and you can change any of them to what works best for your strategy and the market you are trading. The best way to know the best settings is to backtest your strategy using different settings and, then, evaluate the performances to find the settings that work best.

How do I avoid false signals with Zero Lag Stochastic?

To avoid false signals with the zero-lag stochastic, you should combine the indicator with other analysis tools or indicators that complement it. This way, you can have a broader view of the market and make more precise trading decisions. You will be able to create a reliable trading strategy with clear entry and exit criteria and a risk management plan. This will allow you to only trade signals that fit your criteria so that even when some signals fail, they become part of the inevitable losing trades that make up a profitable system.

Can beginners use Zero Lag Stochastic effectively?

Yes, beginners can use the zero-lag stochastic effectively if they have learned how the indicator works and how to make use of it in their trading strategies. The most important thing is to know how to combine it with price action analysis and other indicators to formulate reliable trading strategies. Also, they have to backtest every trading strategy they create with the indicator before committing money to it.

What are the typical strategies using Zero Lag Stochastic?

The typical strategies using zero lag stochastic include:

• Trend-following, pullback-reversal strategy: This strategy uses the zero-lag stochastic to identify when the momentum of a pullback is ending. It is used to anticipate the emergence of a new impulse wave in the direction of the trend. For instance, if a trendline shows that the trend is up, you can go long when the Zero lag stochastic line crosses above the Signal Line in an oversold level.
• Divergence strategy: The divergence strategy aims to anticipate price reversals using the indicator’s divergence from price swings. A bullish reversal is when the price makes a lower low and the indicator makes a higher low, while a bearish reversal is when the price makes a higher high and the indicator makes a lower high.

How do I backtest Zero Lag Stochastic?

To backtest the zero lag stochastic, you can follow these steps:

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

What are the common mistakes when using Zero Lag Stochastic?

The common mistakes when using Zero Lag Stochastic include:

• Using the indicator alone to find trade setups — this can lead to many losses from false signals.
• Not having a reliable trading strategy with clear entry and exit criteria
• Not following a risk management plan.

How can Zero Lag Stochastic help manage risk?

Zero Lag Stochastic cannot directly help you to manage risk, as it neither shows you where to place your stop-loss order nor the position size to trade. However, you can combine it with other analysis tools to create a reliable trading strategy with clear entry and exit criteria and risk management parameters.

What are the limitations of Zero Lag Stochastic?

The limitations of Zero Lag Stochastic include:

• It performs poorly in volatile sideways markets, as it is highly sensitive to price changes and prone to whipsaws.
• It cannot be used as a standalone indicator because of its frequent false signals.
• It cannot anticipate changes in market conditions.

Where can I find more resources on Zero Lag Stochastic?

Where you can find more resources on Zero Lag Stochastic include:

• Trading blogs and online courses, such as the one you’re reading now, therobusttrader.com and quantifiedstrategies.com — you can also enroll in online courses to learn more.
• Trading forums and communities on Forexfactory, Twitter, and Reddit.
• Trading platforms and backtesting software, such as TradingView where you can learn from developers’ explanations and practice with the indicator.