Introduction to the Zero Lag MACD Indicator
The classic MACD is a popular oscillator because of its effectiveness in identifying reversals. However, it does tend to have a weakness which is lag. The Zero Lag MACD is an attempt at improving the classic MACD by eliminating the lag and making it more responsive to price action.
What is the Zero Lag MACD Indicator?
The Zero Lag MACD Indicator is an oscillator type of indicator which is a modification of the classic Moving Average Convergence and Divergence (MACD). In fact, it is simply a MACD indicator which attempts to eliminate lag as much as possible.
The Zero Lag MACD Indicator plots histogram bars which represent the MACD bars and a line which represents the corresponding signal line to the MACD bars.
How the Zero Lag MACD Indicator Works?
The Zero Lag MACD Indicator modifies the formula used on the classic MACD, which is a simple computation of difference between two Exponential Moving Average (EMA) lines. The Zero Lag MACD uses a complex formula which somehow adds more weight on the latest movements of the underlying EMA line.
It also uses a signal line which is also an Exponential Moving Average of the MACD bars. This method creates MACD bars and a signal line which is very responsive to price movements and supposed to have lesser lag compared to the classic MACD.
How to use the Zero Lag MACD Indicator for MT4
The Zero Lag MACD Indicator has three variables which traders can use to tweak the sensitivity of the indicator.
The “Fast EMA” variable controls the number of bars used on the faster underlying EMA line, while the “Slow EMA” controls the number of bars used for the slower underlying EMA line.
The “Signal EMA” allows users to adjust the number of periods the signal line would compute for the EMA of the MACD bars.
The Zero Lag MACD Indicator can be used just as the MACD is used.
It can be used to spot reversals coming from an overextended price level based on the crossing over of the MACD bars and the signal line.
It can also be used to determine trend direction based on whether the MACD bars are generally positive or negative.
As an oscillator it can also be used as a basis for divergence based trades.
Buy Trade Setup
When to Enter?
Identify a market with a confluence of an uptrend and a bullish divergence. Open a buy order as soon as the MACD bars cross above the signal line. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as the MACD bars cross below the signal line.
Sell Trade Setup
When to Enter?
Identify a market with a confluence of a downtrend and a bearish divergence. Open a sell order as soon as the MACD bars cross below the signal line. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as the MACD bars cross above the signal line.
Conclusion
The Zero Lag MACD is an excellent oscillator since it builds around the reliability of the classic MACD and improves on it further by making it more responsive to potential price action reversals.
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