Trading the Trend Sweetspot

The Zerolag Oscillator was designed for trading the trend sweetspot. In the following, we’ll describe the changes that took place with the NT8 conversion. A lot of testing and tedious analysis went into this, resulting in major improvements on trade setup filtering and signal accuracy. Here’s a quick summary of what the update is all about:

  • New Filters for Momentum, Key- and Secondary Retracement Signals
  • Adding the Efficiency Ratio as a trend filter
  • Option to customize oversold/overbought levels
  • Eliminating retracements caused by gaps
  • Discretion on conditions for setup confirmation

The specifics of the various updates are outlined below. We have also created a video explaining the updates 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 new version 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 Retracement Signals:

Key Retracements generally see the best risk to reward ratios because they signal the first significant pullback in a new trend. 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 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 trend, can also be eliminated.

Secondary Retracement Signals:

Secondary Retracements occur following the initial Key Retracement and may also produce favorable risk to reward ratios. Once a significant secondary pullback appears, the indicator will plot a signal if a trend continuation has been confirmed. 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 trend continuation, can also be eliminated.

Trend Filters:

The NT8 update includes an option of adding the Kaufman Efficiency Ratio as a trend filter. The Efficiency Ratio also comes with a chop filter, designed to reduce noise signals in sideways markets.

Overbought/Oversold Thresholds:

The NT8 version also allows for specifying the stochastics oversold/overbought levels. Late entry and trend exhaustion thresholds filters can also be adjusted, alternatively, turned off entirely.

Gap Filters:

The NT8 version 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.

Discretion on Setup Confirmation:

The NT8 version allows for the option of requiring signal confirmations to be accompanied by a close above/below the high/low of the setup bar (Thrust Bars). If ThrustBars are not required, the indicator will look for a histogram value that confirms a continuation in the direction of the trend.

Don’t hesitate to get in touch with us if you’d like to trial the new version for NT8.