Trend Following Sweetspots

The Zerolag Oscillator was designed for trend following scenarios, specifically locating the middle chunk of a larger move. Below, we discuss the most important filter options. A lot of testing and tedious analysis went into this, resulting in a powerful tool for trend setup customization and signal accuracy. The following is a quick summary of the available features:

  • Filters for Momentum, Key- and Secondary Retracement Signals
  • Choosing between the Efficiency Ratio and SuperTrend as filter
  • Option to customize oversold / overbought thresholds
  • Eliminating setups caused by overnight gaps
  • Flexibility on requirements for signal confirmation

The specifics of the various filters are outlined in the text below. A video introducing the various features is available here:

Momentum Signals:

Momentum setups occur when the histogram crosses the indicator’s zeroline. When trading the trend sweetspot, this allows for early trend entries. However, the risk stop level for these setups are generally further removed than the signals discussed below. The indicator allows for defining a max/min. range size of the momentum bar. Furthermore, one may define the maximum number of new trend bars for when the momentum bar must plot. Finally, one may also specify that a momentum bar has to set a new high/low, marking a breakout from the previous area of consolidation.

Key Trend Following Signal:

Key Retracements (K) generally see the best risk to reward ratios because they signal the first significant pullback in a new trend. A pullback in a new uptrend is indicated by white histogram bars, whereas a short scenario will display yellow bars. Once the trend has been confirmed, a Key Retracement signal will plot. This is generally refered to as trading the trend sweetspot, as it allows for a relatively early trend following entry with modest risk. Additional filters, including eliminating signals that see a significant trend momentum fall-off, and/or divergence from the prior histogram swing high/low levels, are also available. Setups that indicate a lack of supply/demand to confirm the move, can also be eliminated.

Secondary Trend Following Signal:

Secondary Retracements (R) occur following the initial Key Retracement and may also produce favorable risk to reward ratios. Once a significant secondary pullback appears, again indicated by white/yellow bars, the indicator will plot a signal if a trend continuation has been confirmed. Additional filters, including eliminating signals that see a significant momentum fall-off, and/or divergence from the prior histogram swing high/low levels, are also available. Trend following setups that indicate a lack of supply/demand to confirm trend continuation, can also be eliminated.

Filters for Trend Bias:

The Zerolag Oscillator includes the option choosing between the Kaufman Efficiency Ratio and the SuperTrend as trend following filters. The Efficiency Ratio compares momentum with volatility and includes a chop filter, designed to reduce noise signals in sideways markets. Specifics of the Efficiency Ratio is available in this Indicator Spotlight. The SuperTrend on the other hand, is essentially a trailing stop. When the stopline is broken, the SuperTrend bias will change. Additional information on the SuperTrend is available from our NinjaTrader Indicators Library.

Trend Following Thresholds:

The Zerolag Oscillator allows for specifying the stochastics oversold/overbought levels. Late entry and trend exhaustion thresholds filters can also be adjusted, alternatively, turned off entirely.

Gap Filter:

The Zerolag Oscillator also has a filter to exclude signals that plot as a result of overnight gaps. This is useful for instruments that do not have an overnight session, and for chart templates that only display the regular session.

Thrustbar Setup Confirmation:

Finally, the Zerolag Oscillator allows for the option of requiring signals to be accompanied by a close above / below the high / low of the setup bar (Thrust Bars). If not activated, the indicator will simply look for a histogram value that confirms a continuation in the direction of the trend.

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