There are two major things that traders must get right when trading the forex markets – trade direction and entry timing. Trade direction is basically the decision of whether to take a buy trade or a sell trade. Most traders get this right. They have the right idea where the market is going, but is this enough?
Many traders often complain that price just hit their stop loss prior to going the direction of their trade. Some complain that it was a stop hunt. Everyone can argue whether it is a stop hunt or not, but one thing is certain, if they have timed the entry right, they would have been in the trade as it moves to their favor.
Timing is the second critical decision that traders should make and is more difficult to get right. Traders often get market direction right but also time the market wrong. They still end up losing on a trade that should be a winning setup.
Timing the entry is more difficult because unlike trade direction where you are presented with only two options, timing presents you an unlimited number of options. Basically, any candle could be an entry point.
Timing the market right is a balance between waiting for confirmation and not being late in an entry. Traders either get in on the market too soon or too late. Traders either complain that a signal is not accurate because they took a trade without confirmation, or too lagging because they waited for the confirmation which came in late.
Zero Lag Reversal Forex Trading Strategy produces trade signals that are based on a balance between a confirmation and an accurate signal. It attempts to remove the lag off a reliable indicator allowing traders to have the best entry possible.
Zero Lag MACD
Zero Lag MACD is an oscillating indicator based on the popular Moving Average Convergence and Divergence (MACD) indicator.
The classic MACD is derived from the difference between two moving averages, which is the MACD line. The indicator then computes for another moving average based on the MACD line, which is called the Signal Line.
Trend direction is based on the crossovers of the MACD line and the signal line. If the MACD line is above the signal line, the indicator will indicate a bullish trend. If it is stacked inversely, then the indicator will indicate a bearish trend.
Another way to use the MACD is by observing where the lines are. If the lines are positive, then the trend is bullish. If the lines are negative, then the trend is bearish.
The MACD is a great trend-following indicator, however it is also lagging. It produces trade signals a tad bit later than the actual reversal. Zero Lag MACD attempts to produce a better signal by reducing the lag significantly.
EMA Crossover Signal
The EMA Crossover Signal is a simple entry signal indicator based on the crossover of Exponential Moving Averages (EMA).
Exponential Moving Averages are moving averages which is a great balance between a very responsive moving average line and a reliable trend indicator. It moves along with price movements closely yet manages to avoid false signals most of the time.
Crossovers are one of the most basic entry signals. This simplicity is probably the reason why it has fallen out of fashion. However, with the right setup crossover entries could still be very powerful.
EMA Crossover Signal simplifies the signal by placing arrows on the price chart indicating the trend reversal candle.
Trading Strategy
This strategy uses the confluence of the Zero Lag MACD indicator and the EMA Crossover Signal to produce good trade entry signals which could result in a trend.
The Zero Lag MACD lines and bars should cross over zero to indicate a trend reversal. A cross from negative to positive would signal a bullish trend reversal, while a cross from positive to negative would signal a bearish trend reversal.
The EMA Crossover Signal should then confirm the trend reversal. The indicator should plot an arrow pointing the direction of the trend reversal a few candles after the Zero Lag MACD trend reversal signal.
Indicators:
- EMA Crossover Signal
- Faster EMA: 12
- Slower EMA: 24
- ZeroLag_MACD
Preferred Time Frames: 4-hour and daily charts
Currency Pairs: majors, minors and FX crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- The Zero Lag MACD line and bars should cross above zero.
- The EMA Crossover Signal indicator should print an arrow pointing up.
- Enter a buy order on the confluence of these conditions.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the Zero Lag MACD bar crosses below zero.
Sell Trade Setup
Entry
- The Zero Lag MACD line and bars should cross below zero.
- The EMA Crossover Signal indicator should print an arrow pointing down.
- Enter a sell order on the confluence of these conditions.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the Zero Lag MACD bar crosses above zero.
Conclusion
This trading strategy is an excellent trade entry strategy. It allows traders to catch big trending moves that could trend for quite some time.
This strategy is best used as an entry confirmation. Traders could have an entry zone but would want to time the entry correctly. They could use this indicator to identify if price has already reversed as soon as price enters their supply or demand zone.
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