Establish the trend

When the histogram is above the zeroline, the histogram bars are plotted in lime or green color. These colors represent an uptrend. An uptrend favors long setups. When the histogram is below the zeroline, the histogram bars are plotted in red or salmon color. These colors represent a downtrend. A downtrend favors short setups. The oscillator uses a particularly long lookback period (default setting 144 bars) to display the current trend. This makes it easier to find valid trade setups.

Trade Setups

Counter traders enter new trends early. Those trades are typically high reward & high risk trades. The win rate of counter trades is low, as the old trend may resume and take out the stop. Also, the stop should be set wide, as volatility often peaks during trend reversals. However, the reward can be large, when the counter trend trade is successful. Although the Zerolag Oscillator can be used to identify counter trend trades by drawing divergences, this is not what it is designed for.

The indicator is primarily designed for finding retracement entries. The idea is to find the middle chunk of a larger trend. This is also referred to as a wave 3 when using the terminology of Elliot wave patterns. Therefore the task is to find the sweet spot, where a new position can be built and held during the major part of the trend.

To find a valid entry...

• the new trend should be established but not yet have matured
• the new trend should be challenged by an adverse price move
• the new trend should resume after the challenge

This is what can be considered a sweet spot. A young trend has just imposed itself. New traders will jump on the band wagon while traders from the other side will close out their positions.