What Is The Zero Lag Exponential Moving Average & How To Trade With It

Zero Lag Exponential Moving Average

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.

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.

Zero Lag Exponential Moving Average on the chart
Zero Lag Exponential Moving Average on the chart

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.

Zero Lag Exponential Moving Average parameters
Zero Lag Exponential Moving Average parameters

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.

Zero Lag Exponential Moving Average bearish and bullish trend
Zero Lag Exponential Moving Average bearish and bullish trend

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 buy setup
Zero Lag Exponential Moving Average buy setup

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 sell setup
Zero Lag Exponential Moving Average sell setup

Zero Lag Exponential Moving Average Conclusion:

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.

I would prefer to use the majority of technical indicators such as the Zero Lag Exponential Moving Average indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Zero Lag Exponential Moving Average indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Zero Lag Exponential Moving Average indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Zero Lag Exponential Moving Average indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!