The Zero Lag Exponential Moving Average or better known by its name ZLEMA is a type of Exponential Moving Average. The technical indicator was developed by John Ehlers and Rick Way in 2010. It can help to reduce the lag from the EMA to track price swings and price averages more precisely. Hence the name, Zero Lag. The idea is do a regular exponential moving average (EMA) calculation but on a de-lagged data instead of doing it on the regular data. Data is de-lagged by removing the data from “lag” days ago thus removing (or attempting to) the cumulative effect of the moving average.
What is the Zero Lag Exponential Moving Average?
The ZLEMA applies exponential moving average to de-lagged data (original data remove from the lag). This gives the indicator an advantage as typical EMA is used on the regular data.
The calculation of the ZLEMA for n-day is:
ZLEMA = EMA of (close + (close-close[lag]))
Where lag is (N-1)/2 days.
When plain EMA is applied on a straight line, it closes at (n-1)/2 days. So, the authors of ZLEMA included another close in the equation to subtract the lag and track a straight line.
Mostly, moving averages don’t give a straight line, but when it appears, the ZLEMA values are the same as the prices.
If the price changes suddenly, the ZLEMA adapts at the same time. This is because of the calculation of the de-lagged data.
As we move to the past data, the ZLEMA removes the lag by expanding the price increase or decrease between N and N-1/2 days.
To apply the indicator on MT4, you can set the parameters to default or change according to your individual trading strategy needs.
How to use the Zero Lag Exponential Moving Average?
As the Double EMA and Triple EMA, the ZLEMA is commonly used in trend trading strategies. It is accustomed to all timeframes and can be used on different trading instruments including forex currency pairs, stocks, indices, commodities, cryptocurrencies and more.
The bullish trend appears when the ZLEMA is above the regular EMA, and bearish trend when ZLEMA is below the EMA.
We may look to enter buy orders when the ZLEMA crosses over the EMA, and sell orders when ZLEMA crosses below the EMA.
One thing you need to remember is the value of EMA. In forex trading, the commonly used EMAs are 5, 10, 12, 20, 26, 50, 100. Short-term traders using 5 minutes, 15 minutes, or 1-hour chart, use EMAs 5 or 10. Long-term traders use 50 or 100 EMAs.
By combining the ZLEMA with other moving averages like FRAMA (Fractal Adaptive Moving Average) or HMA (Hull Moving Average), ZLEMA shows the prevailing trends.
When using ZLEMA with other moving averages, we could look for crossovers.
On the chart below, you can see the ZLEMA and the FRAMA. The black line symbolizes the ZLEMA, whereas the green line represents the FRAMA.
The bullish trend appears when the ZLEMA is above the FRAMA. Conversely, the bearish trend appears when the ZLEMA is below the FRAMA.
Zero Lag Exponential Moving Average trading strategy
As we already mentioned, the ZLEMA is considered for the trend trading strategies, when combined with other indicators. When the market is strong, the ZLEMA line shows an uptrend. Similarly, when there is a weak market, the ZLEMA displays a downtrend.
For example, if the price action of a strong uptrend begins to show reversals, it could be time to look to enter a sell order.
Zero Lag Exponential Moving Average buy strategy
- Wait for the price bar to close bullish before entry.
- Enter the market when the ZLEMA is in an uptrend.
- Place a stop-loss near the swing low area.
- Exit when the ZLEMA shows a downtrend.
Zero Lag Exponential Moving Average sell strategy
- Wait for the price bar to close bullish before entry.
- Enter the market when the ZLEMA is in a downtrend.
- Place a stop-loss near the swing low area.
- Exit when the ZLEMA begins an uptrend.
Zero Lag Exponential Moving Average Conclusion
The Zero Lag Exponential Moving Average indicator was created by John Ehlers and Rick Way. As with the Double Exponential Moving Average (DEMA) and Triple Exponential Moving Average (TEMA), and as the name suggests, the goal is to eliminate the lag, which is inherent in all trend-following indicators and averages the price over time.
The zero-lag exponential moving average (ZLEMA) is a type of exponential moving average that seeks to reduce the inherent lag seen in a typical moving average. It was designed to track the price more closely and give a clearer view of the trend with no lags.
The Zero Lag Exponential Moving Average indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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