The Zig Zag indicator is there to apply consistency to trading signals. This should translate into a more consistent application of other trade strategies. The tool operates, based on a very simple principle. It identifies the most important highs and lows in the chart and connects them with lines, without taking minor price swings into consideration (a similar principle Renko chart is based on). Unlike many other indicators, ZigZag doesn’t predict the future price moves on its own, it just identifies strong price changes in the past. The indicator looks like an angled line, similar to a zigzag (that where the name is from), which is attached to the main chart.
The ZigZag indicator is adjusted according to three settings, let’s see their particular features:
Deviation variable is the number of pips or points (depending on the market) between two highs or lows of the consecutive candlesticks (or bars, depending on the price chart type). By default, the value is 5%. Therefore, price changes of 5% and more are indicated by a ZigZag line, the movements below this threshold are removed from the trendlines.
Backstep setting reflects the minimum amount of candlesticks (or bars) between which the high and low can be plotted.
Depth parameter shows the minimum number of candlesticks, according to which the local extreme won’t be constructed if it is higher or lower of Deviation parameter. It means, that the setting reflects the minimum number of candlesticks with no second maximum or minimum deviation from the candlestick.
You may try different values for the parameters. A change will affect the indicator sensitivity to the price changes. If set lower values, the number of local highs and lows will increase, and so, the indicator will paint more lines.
Based on these settings, ZigZag indicator operates in the following way: after it records the first, lowest point, it is looking for a reversal point until the corrective downward movement doesn’t exceed the set values. As soon as it occurs, the ZigZag indicates the second, highest, point in the price chart. Next, the indicator, according to the same principle, is looking the third point, lowest in the period, and so on, as long as Depth parameter is met. Thus, the angles, drawn by a zigzag pattern in forex, result from price changes by a certain percentage, equal or more than the set values.
Standard ZigZag indicator is the most efficient, combined with other technical tools, for example, fractals, Bollinger bands or Elliot wave formations. In addition to the standard version, there are numerous modifications (you can find them on the form, follow the link at the end of the article), which can enhance the indicator capacities. Unlike many other indicators, ZigZag doesn’t predict anything on its own, it only reflects the price movements in the past. Nevertheless, it is a quite efficient complementary tool to assess the current market situation. This tool is available in almost every popular trading terminal. For example, in MetaTrader 4, it is by default in the User Indicators tab.
ZigZag indicator operates in a way, similar to the price charts like Point and Figure chart, Renko chart and Kagi chart, as it removes random sideways price movements within the main direction, that is, it is a kind of corrective filter. Since random price moves often distract traders from reading the price chart and worsen the quality of market analysis, then ZigZag indicators increase the trading performance.
This indicator has a number of advantages:
It helps analyze the strongest market trends, eliminating the market noise;
It can be applied to different timeframes;
It is easily combined with different tools of technical analysis;
It is very efficient together with Elliot waves and Fibonacci grid.
When you apply ZigZag indicator, you need to keep in mind that the last section may change, according to the changes of the data analyzed. That is why ZigZag is applied to analyze the price changes in the past. Here are the main drawbacks of ZigZag indicator:
It is difficult to make an objective forecast (different traders interpret the same phenomena in different ways);
If you use the standard version of the indicator, it may often repaint the very last section.
The highest profit can be made when trading in the long timeframes. Therefore, it best suites the traders, using long-term trading strategies. Otherwise, there increases the probability of losing trades.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive /39/EC.
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Litefinance">Jana Kaneeunic-brussels.eu
ZigZag indicator in Forex
One of the important elements of successful trading is the chart analysis. However, many traders face a problem, sometimes, random price fluctuation distract attention and may result in mistakes. ZigZag indicator provides an unobstructed view of the strong market price swings and helps identify price trends.
A ZigZag pattern in Forex is made of trend lines that connect important extremes in the price chart, which are tops and bottoms. Therefore, this pattern, clearly outlined in the price chart of a trading instrument, indicates important reversal moments of the trend. To see it in the chart, traders use ZigZag indicator as a complementary tool. It is not used for direct price forecasts as it just identifies important trend pivot points, eliminating random price movements within the major trend.
If you have heard about trading strategy based on Elliot waves, you are already familiar with a complementary ZigZag indicator, which allows you to make fewer mistakes in constructing the waves, filtering off random market noises. For example, different traders may draw Elliot waves in the same chart differently. It results from the fact that each trader sees a particular price movement in his/her own way. The ZigZag indicator is applied to even the analysis.
ZigZag indicator is a great technical tool to identify Elliot waves.
ZigZag indicator is available in trading terminal.
Application of ZigZag Indicator, that draws a zigzag pattern in forex, together with other technical tool, like Bollinger bands, for example, is an efficient approach of technical analysis.
And you see that if the price breaches the higher low, your trade is invalidated:
So, you place a stop loss right below the swing low:
It is easier for you to accept that your trading idea is invalid and that you could potentially avoid account-killing losses:
Of course, there’s more to stop loss and having an edge in trading.
So I suggest you check these articles out:
The Complete Guide to Stop Loss Order
How to be a Profitable Trader Within the Next Days
I know that I seem to be glorifying the zig zag indicator to the point that this is the “holy grail.”
In reality…
A zig zag indicator is still a trading tool at the end of the day.
It can be mishandled and used in the wrong way the same way it can help improve your trading.
So what are these mistakes you might ask?
Keep reading.
One mistake to avoid when using the zig zag indicator, do this instead
As I’ve said…
The zig zag indicator is still a simple trading tool that’s easy to understand.
But it’s not a magic indicator that brings in profits.
The zig zag indicator has its weaknesses as well.
Here’s what you shouldn’t do if you want to add the zig zag indicator into your trading arsenal…
Being too dependent on it
Here’s the zig zag indicator with a 10% deviation period on LULU:
Okay now here’s the same indicator with the same settings but on USDZAR:
Holy crap, they look different and they’re the same settings!
At the same time…
Here’s the zig zag indicator with a 10% deviation period on GOOGL on the daily timeframe:
And here’s what it looks like on the 1-hour timeframe on the same stock:
Man, what a headache!
And this is one of the main weaknesses of this indicator.
The settings may depend on which market and timeframe you trade.
Because if you recall…
The zig zag indicator ends by drawing a line when it crosses a certain percentage on your chart:
Since volatility depends on the specific market, what’s the solution?
There are two:
Choose your entry timeframe
Use the recommended settings
Let’s dive into this…
1. Choose your entry timeframe
Here’s the bottom line…
Only use the zig zag indicator on one timeframe.
Because the more consistent you are on which timeframe you trade on, the more effective the zig zag indicator would be for you.
So if you choose to trade on the 1-hour timeframe for example.
Hide the zig zag indicator when you are analyzing the higher timeframe.
Makes sense?
Next.
2. Use the recommended settings
Yes.
I will be giving you a “cheat sheet” on which indicator period to choose.
Assuming that the zig zag indicator you are using would be the percentage-based indicator.
However, the main principle behind the values would be this:
Choose a zig zag indicator period until you can see the “zig-zags” in the market.
Here’s what I mean:
Got it?
So, here are the recommended settings for the zig zag indicator for different markets assuming you are trading the daily timeframe:
Stocks on D1 = Deviation (%) 8 to 10
Futures on D1 = Deviation (%) 3 to 8
Forex on the D1 = Deviation (%) 1 to 3
Makes sense?
Now at this point…
You’ve learned how the zig zag indicator can help you out in trading and also what not to do when using the indicator.
So how do we put everything in place?
What’s the step-by-step process on how you can use the zig zag indicator along with your strategy?
Well, stay tuned.
As that’s what we’re going to discuss next…
A simple zig zag indicator price action strategy that you can use in both bull and bear markets
The zig zag indicator is often used as a trend reversal indicator.
So if you have a zig zag indicator that draws a new leg after a 10% drop…
It would indicate that the market is bound to bounce up anytime soon.
But what I’m about to show you is how you can use the zig zag indicator to compliment your method as a price action trader.
And a specific price action formula that we would use is the MAEE formula which stands for:
Market structure
Area of value
Entry trigger
Exits
So let’s have a deep dive on how the zig zag indicator works its magic with this formula, shall we?
Market structure
Quick reminder:
The MAEE formula is a step-by-step process on how you should approach your chart!
So, identifying the market structure is the very first thing you should look for.
Is the market in an uptrend?
Then look for buying opportunities.
Is the market in a downtrend?
Look for selling opportunities.
Is the market in a range?
Look to buy low and sell high or vice-versa.
So, in this example, what is the market condition?
With the help of the zig zag indicator, we can see that this forex pair is in an uptrend:
There you go!
So what’s next?
Area of value
Given that the market structure is in an uptrend, we will be looking for buying opportunities.
So, in this case, the area of value would be if the price retests the new area of support.
Pretty simple, right?
Entry trigger
Valid uptrend?
Check.
The price is currently at the area of value?
Check.
So, how do we enter this market?
Well, there are a ton of ways to do this.
But to keep things simple, a bullish rejection candle or candlestick pattern would do:
In this case, the price made a bullish engulfing pattern along the area of value, so what you can do is to enter at the next candle open.
Again…
Whether it’s a:
Hammer
Bullish engulfing
Piercing
Morning star candlestick pattern
It doesn’t matter.
As long as it is a bullish price rejection at the area of value, then it is a valid entry trigger.
Sounds good?
Finally, the easy part.
Exits
Why is this the easy part you may ask?
Because a while ago, I’ve taught you how the zig zag indicator can easily be a reference to your take profit and stop loss, remember?
So in this example, your stop loss would be below the swing low, and take profits before the nearest swing high:
The same concept applies whether you are trading downtrends and ranges as well.
The key is to always trade in the direction of the trend, or appropriate to the current market condition.
And there you go!
So before we end this ultimate guide to the zig zag indicator…
Let’s do a quick recap, shall we?
Conclusion
The zig zag indicator is an accessible trading indicator that produces and visualizes swing highs and lows in the market
The zig zag indicator is often used as a trend reversal indicator, however, it also benefits price action traders by almost instantly visualizing swing points in the market
The setting of your zig zag indicator should depend on the market and the timeframe you are in
You can use the MAEE formula along with the zig zag indicator to look for trading opportunities across different market conditions
So over to you…
Have you tried the zig zag indicator before?
Have you seen it on your platform but never tried it before?
If you’ve tried it already, how did it go?
Let me know in the comments below!
Indicator ZigZag: the best route for finding key points
In fact, indicator ZigZag is a graphics filter to simplify the visual picture of the price movement. It does not modify the price data, performs a minimum of the mathematical calculations and is considered a signal tool for analyzing trend market.
Its key points are formed only with the strong price movements (above the set parameter), and small fluctuations are eliminated. This allows you to determine the main points of the turn and to identify the emerging graphics and wave structures; sections of trend movement connect significant extremes on the chart.
ZigZag enjoys a special appreciation among the enthusiasts of the wave trading.
Let us see exactly how this works.
Logic and purpose
The history hasn't kept a name of the ZigZag indicator’s author (in a modern look), but his prototype, most likely, has appeared during the development of the wave analysis.
The main task of indicator is to reveal the trend sites on the price chart and to estimate the probability of a turn (or continuations).
While the calculation the most important extremes are filtered by the usual comparison of the current dynamics with the ZigZag parameters.
ZigZag doesn't predict the behavior of price in the future, and only indicates considerable changes in past – for this reason in its calculation prices Close are used. Indicator builds lines only according to actual data, the result of the graphical analysis looks like a broken trend figure on the price schedule.
Calculation procedure
If the movement of the price exceeds the established values, then on main schedule the corresponding extremes will be designated, otherwise ZigZag won't pay attention to them. But if the indicator nevertheless has connected two extremes into a straight line, then this site of price schedule can be considered «confidently» trend.
For example, the calculation formula at first «looks for» price minimum corresponding to Depth parameter conditions (see below) and fixes it on the graphic. If the market continues to fall, then every time when the price falls by the step distance (parameter − Deviation) or more, a final point of the line will move below and below.
Trading signals of the indicator ZigZag
The local minimum will be updated until market conditions for a turn appear: the price has to go against the current direction by the step size. Then indicator ZigZag begins to look for a local maximum, at the same time it investigates period consisting of the candles set in Depth variable again.
In the case of success, indicator will create the new site of the broken line already against a trend, and the further − cycle is repeated (see Trading with ZigZag indicator).
From this point of view, we recall: indicator ZigZag allows «redrawing» entire graphic design with strong price rolls. The last (forming) section can change its direction and length depending on the current price changes. This can be a serious problem for short-term trading.
Parameters and control
The standard version of the indicator can be found in any trading platform, names of the parameters in different versions can differ, but three basic filters surely are present at settings.
They define what extremes the mechanism of calculation will consider significant and, respectively, to connect these sites trend lines ( see How To Use ZigZag indicator).
So the basic parameters are:
Deviation (sometimes – ExtDeviation): the minimum quantity of the points (in % between min and max of two next bars) which is necessary for the formation of a new local extremum. All price movements above this value will be noted by the ZigZag line, and those that are less, − are ignored. In the majority of the trading platform versions 5% of the deviation are offered by default, values more than 10% make sense only for assets with non-standard volatility. Results of the graphic creation of the indicator depend on a timeframe.
Depth (ExtDepth): the minimum quantity of bars at which ZigZag won't form a new extremum even if the condition for the Deviation parameter is satisfied. For example, if the value 10 is established, and the change in price has happened for 9 (bars), then the indicator simply «skips one step».
Backstep: a minimum quantity of the bars between consecutive local max/min. If this condition isn't satisfied, new extremum isn't formed even if the first two parameters are met.
There are no strict rules for the choice of parameters, but, as a rule, settings are by default rather balanced, and are recommended for medium-term trade in the most popular assets.
Standard version of the ZigZag indicator
Key parameters for non-standard assets (or trade conditions) can be changed, but you shouldn't be fond of the experiments too. Change of the basic values rather strongly influences the indicator’s degree of the sensitivity to movement of price.
If calculation parameters are too small, number of local max/min increases, indicator will build more small sections and make long trend line more «torn». As a result − a lot of «false» signals.
The long and short step of the ZigZag indicator
It is beneficial to use versions of the ZigZag with a different color for lines for bullish and bearish trends. Many modified versions can be found on the network, but more additional parameters indicator has, more difficult it is to identify its signals.
Let’s look at it in detail.
Trade indicator signals
Indicator ZigZag has a wide range of the applications, despite the fact that it does not provide traditional, explicit entry points.
So, you can
determine the direction of the trend and build trend line − through the extreme points (see Using Graphic Tools);
see support/resistance levels;
ZigZag indicator on support/resistance levels
estimate the depth of the possible correction and the Stop Loss levels (for example, using Fibonacci levels);
The scheme of the trading signals set Fibo+ZigZag
perform wave analysis and corresponding graphical constructions;
ZigZag and wave patterns
identify the classical patterns on the price chart.
Classic «Butterfly Gartley» on ZigZag
Please, keep in mind: the last (not completed) section of the ZigZag line is always in dynamics.
What this means is:
The position of the endpoint is constantly changing until the indicator’s mechanism «decides» that a new extreme has formed. It is necessary to take into account the market activity − speculative movements can break down a graphic design, therefore, news periods or other fundamental events require a special attention.
The main logic of the ZigZag indicator
Several practical remarks
Indicator ZigZag cannot create a complete trading system: it does not give explicit trading signals, does not make forecasts, and does not participate in the search for opening/closing signals.
This information helps to choose the direction of the transaction and establish optimal Stop Loss, which steadily saves a trader from possible losses. A different application of the indicator conflicts with the main calculation mechanism, so it is recommended only on timeframes from H1 and higher.
ZigZag: examples of the specs
The indicator guarantees approximately the same accuracy on any trading asset, but we should remind that its calculation does not use smoothing or averaging mechanisms.
Result?
Is that any price shots cause an incorrect response and «break» ZigZag lines, that is, its information cannot be trusted during periods of a speculative market.
ZigZag is an effective tool for assessing the current market position and well complements any trading strategy. Thanks to it, a trader will not be distracted by small price fluctuations and will not miss the global reversal. It is recommended use actively for both the beginners and professional traders.
Try It Yourself
After all the sides of the indicator were revealed, it is right the time for you to try either it will become your tool #1 for trading.
In order to try the indicator performance alone or in the combination with other ones, you can use Forex Tester with the historical data that comes along with the program.
Simply download Forex Tester for free. In addition, you will receive 23 years of free historical data (easily downloadable straight from the software).
Share your personal experience of the effective use of the indicator ZigZag. This article was useful to you? It is important to us to know your opinion.
What is your favorite indicator?
Using the Zig Zag Indicator to Create a Forex Trading Strategy
The Zig Zag indicator, named for the pattern of straight lines that appear to zig-zag across a technical analysis chart, operates as a filter for directional changes in price movements. Technical analysts and forex traders apply the Zig Zag filter to remove unnecessary noise from the price chart; the goal is to focus on the important trends, not insignificant fluctuations. This indicator should never act as a trading system on its own. Instead, the Zig Zag indicator is best used to highlight important patterns and confirm possible trend reversals.
Key Takeaways
The Zig Zag indicator is a basic tool used by traders to identify possible trend reversals.
The indicator is not the only tool a trader should use to make investment decisions.
When starting a possible trade, the Zig Zag indicator should be the first tool used. Confirmation is then required from other, more precise trading tools. These depend on the individual trader and their overall strategy.
How the Zig Zag Indicator Works
The Zig Zag indicator is easy to understand and apply. Price changes below a specific threshold, normally 10% or 20%, are removed from trendlines through a filtration process. Most trading software or online trading platforms have simple input fields that allow you to set the parameters of your own Zig Zag preferences.
Keep in mind that the higher you set the price change threshold, the less sensitive the indicator becomes. If you set too low of a spot, it results in an ineffective Zig Zag since not enough noise is removed. Too restrictive and you may miss profitable price trend data. Most default settings have a threshold between 8% and 15%, although this has as much to do with the individual trader's strategy as it does with overall price movement.
Trading Forex With the Zig Zag
The Zig Zag tool is designed to be complementary and should not be the focal point of a forex trading strategy. It is most commonly used in conjunction with Fibonacci or Elliot Wave trading systems. Swing traders love the Zig Zag because it helps them analyze entries on possible retracements.
This should translate into a more consistent application of other trade strategies. Whatever trading strategy you use, keep in mind that the Zig Zag is a lagging indicator, which means that it does not predict anything on its own. The forex market is notoriously fast-paced, so try to complement it with a system that offers leading signals if possible.
Like many trading indicators, long-term trend reversals take more time but are shown to be more reliable than indicators that show short timeframes, like those of days, hours, or minutes.
Many traders trade with a variety of tools. The Zig Zag indicator shows when a trend could be reversing, but the trader will compare that indication against other trading tools they use in order to execute their strategy. Common forex trading tools are volume indicators, buy/sell momentum indicators, and relative strength indicators, called RSIs.
Investors that use trading platforms want reliable data that isn&#;t corrupted by market noise. The Zig Zag indicator is the tool that can filter minimal fluctuations in the price trends of an asset, enabling traders to precisely follow the current trend. It is also practical for locating price levels of resistance and support.
The Zig Zag indicator is frequently implemented in combination with Elliott Wave Theory to identify the location of individual waves in the complete cycle.
Investors can try various percentage options to learn what set up provides the best outcomes. In some cases, a setting of 6% can define waves more precisely when compared with a setting of 4%. Assets have different patterns; investors can modify the Zig Zag indicator’s percentage setting to be compatible with the asset there are traded, no matter if it’s a stock or securities.
Also Read: Elliott Wave and Its Rules
Contents
The Mechanics of the Zigzag Indicator
The indicator is a basic analysis instrument implemented on price charts to recognize the lows and highs of the price. It works by following when a price experience a change, expressed in a given percentage, after creating a high or a low, and lines connecting the points.
The Zigzag indicator is frequently used on price chart patterns to diagnose a trend. The advantage of the indicator is in the ability to eliminate a certain degree of volatility in markets and represent the trends with highs and lows.
Investors utilize turning points in price to form trend lines, but the validity of the trend lines leans on the settings used with the Zig Zag indicator.
Traders can get a better perspective of the market with the Zig Zag indicator. In a rising trend, price move to new highs and lows. Conversely when a trend moves in a downward trajectory the price creates smaller highs and lows.
The Zig Zag indicator has few settings, one of them is the reversal percentage. When selecting the standard five percent, the technical analysis tool joins the preceding high or low to the present high or low when the price reverses five percent from both.
There are few applications of the indicator. It can be applied as previously said to figure out Elliott&#;s wave theory and can reveal where the price is in the general cycle of the wave theory.
The option to modify the parameters permits investors to test strategies with the Zig Zag indicator and the altering fluctuations can show the indicator framing the Zig Zag lines in a another way.
If in need of a technical instrument that can easily enable you to locate support and resistance levels, the Zig Zag indicators are a great option as they can pinpoint when prices reverse.
The extra benefit is in recognizing possible reversal points with Fibonacci retracement levels.
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The Zig Zag Indicator Formula
The formula for the Zig Zag is not complicated but some explanation is in order.
The values in the formula represent the following:
HL equals High-Low price series or closing price.
Series percentage change equals minimum price movement expressed in percentage.
Retrace equals change a retracement of the previous move or an absolute change from peak to trough?
LastExtreme equals If the extreme price is the same over multiple periods, is the extreme price the first or last observation?
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Calculating the Zig Zag Indicator
When calculating the Zig Zag use these steps
Select an initial point it can be a high or low swing.
Select percentage price movement.
Locate the following swing highs or swing lows that is different from the initial point that equals the higher percentage of the price movement.
Form a trend line from starting point to the new point.
Locate following swing high or swing low that differs from the new point that equals the higher percentage of the price movement.
Create a trend line.
Repeat to most recent swing high or swing low.
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Riding a Trend
The capability to eliminate insignificant price movements that happens during an overall trend is a priority for traders. The Zig Zag indicator is created to assist investors in perpetuating a profitable market position during a consistent trend.
On a chart trend lines are formed by the Zig Zag indicator. They are modified exclusively if price movement over a chosen percentage happens. The default value on most variations of the indicator is 5%.
That means that the Zig Zag indicator is not sensitive to changes in price that are under five percent.
Investors can modify the indicator and choose a different setting for the percentage. Typically, the values move in the six to ten percent range.
This price movement threshold saves investors from being deceived by minimal price fluctuations. The Zig Zag indicator focuses on the general trend. Some traders leave profitable positions because of minimal price action.
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Practical for Technical Analysis
The Zigzag indicator is not too complicated and can be a practical tool in a trader’s arsenal. Still, experience has thought us, that no indicator is foolproof. When applying it, you should find the appropriate strategy. There are situations where it can be a good fit but also trades where it would be a hindrance on the route to success.
Implementing the Zigzag depend on the existence of a trend, naturally to trade you need a trend, and if you using short –term chart for example in the range of an hour, then the indicator will not display the proper alarms. The reason is lag that by definition will make you late for the opportune trade.
It distorts the risk to reward ratio, which can result in future problems. The unpredictability of the market is not balanced out with technical indicators. And in some aspects trading is similar to gambling, which means that in the long run, your profit must surpass accumulated losses for success.
The Zigzag indicator only perceives the amount of change in the assets price. Most traders focus on price as a metric that reveals the market movement, however, other elements can be useful like moving averages, Fibonacci level, and psychological factors of marker participants.
The Zigzag pattern has no interest in trend line or candlestick price action. Any break in the trend line will be spotted by traders much faster than the Zigzag indicator is capable of doing. Experience has shown that the Zigzag indicator is solid when matched up with larger time frames.
Points to keep in mind when implementing the Zigzag indicator are:
Is more productive in higher time frames.
Not very effective in turbulent sideways markets.
Ignores other technical factors.
The preferred method is to pair the Zigzag with another indicator.
It&#;s modular and should be adapted to investors&#; strategies.
The elaboration of the Zig Zag shows it’s a solid alternative indicator in your strategy. When searching for a probable pullback to start buying, the Zig Zag indicator has already flipped over contra that pullback, and indicates that the indicator is convinced the market is going in a different direction.
Also Read: How does technical analysis work?
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Detecting Price Movement
The best course of action is to implement the Zig Zag when verifying a pullback and continuation of a longer-term trend. When price pulls back in an uptrend and then turns around, resulting in the Zig Zag indicator going bullish.
It’s a solid indication for investors that are focusing on longer-term trades to begin purchasing and improving their position again, and continually harvesting profits.
It&#;s a very practical indicator because it has a basic structure. Most technical analysis tools complicate things and the Zigzags stick to a simple approach. Because of this market analysis is simplified by examining only the percentage of movement.
The Zigzag indicator has value and investors can use it, but by itself, it doesn&#;t create a signal. The only traders that implement the Zigzag for a trade signal are longer-term investors.
Most traders that prefer the indicator use it on daily charts or bigger higher time frames. When applied to short-term charts, the performance gets reduced because it was not originally developed for that type of trading.
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The Zig Zag on Different Types of Charts
The functioning of the Zig Zag indicator is dependent on the chart type it is used on. It functions on closing prices is used on line or dot charts. While when candlestick charts and bar charts are used it reacts to the entire price range. If more changes in the Zig Zag occur, then extra trend lines are formed if bar or candlestick charts since they will show a wider range of prices than charts that only show closing prices.
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Zig Zag Indicator Limitations
Just as is the case with every other trend-following indicator, signals to buy and sell are produced on previous price history. Offering no guarantees that can forecast future price action. In most cases, the trend will emerge and afterword’s the Zig Zag line will be displayed.
Traders need to know that the recent Zig Zag line, that got displayed may disappear soon if the process goes in a different direction in that case the indicator begins creating a fresh line.
When the line is not able to contact the percentage of the indicators setting and there is a reverse in the assets price, the line is detached and changed with an extended Zig Zag line in the trend’s initial direction.
Taking into account the lag, the Zig Zag indicator verifies the direction of the trend and is not suitable for timing optimal entry or exit.
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Conclusion
The Zig Zag indicator offers few benefits for your trading strategy, yet it should get implemented only if you have know how to implement technical analysis in trading strategies.
The recommendation for passive investors, who don’t make adjustments to their trades for long periods, to stay clear of the Zig Zag indicator. It’s not very practical when you need a tool to predict future trends.
Its highly effective in removing insignificant short–term price movements enable us to more easily recognize the important ones. It’s not practical to follow every price movement that happens in the market is not a productive way of your time and resources.
However, not every movement in price requires you to sell or buy. You can be confident that even the most profitable investments will not experience daily fluctuations, and with the Zig Zag indicator, you can identify significant swings in highs and lows, the moments where the price change its course.
The technical indicator helps get a larger perspective about the asset, especially if you see it with other technical analysis tools, that enable you to spot long-term patterns.
It&#;s normal for a stock to experience few swings both highs and lows, and in combination with resistance and support lines, the Zig Zag indicator can be productive.
The Zig Zag is lagging indicator and the reason is that values are presented only when the close of every time period.
Its recommended to use it as a pair with other technical indicators, that way you can compensate for its shortcomings and benefit from its capabilities.
There are plenty of different trading strategies that can be improved with the Zig Zag indicator especially swing and momentum trading.
The key takeaway is that the Zig Zag indicator has a definitive function, it is not a do it all type of too. It was design to for the filtration on minimal changes in the price, making it possible for investors to retain their focus on the general trend.
The Zig Zag indicator is a commonly implemented tool in the trading community. The reason for its wide use, stems from the simplicity of its functioning method that indicates the highs and lows in the price.
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FAQs
How do You Read a Zig Zag Indicator?
The Zig Zag indicator offers an option to observe the general movement on a chart. We can illustrate that with an example if company ABS stock begins the month at $ And in about a week, because of some factors the price declines by 10%, and then goes back up about 10%, the fluctuates are minimal and the general direction is upwards.
What does Zig Zag Pattern Mean?
The Zig Zag indicator reduces the effect of random price fluctuations and gets used to recognizing price trends and changes in price trends.
What Is Zig Zag Strategy?
The goal of the Zig Zag strategy is to help traders stay in a winning position. And not succumb to fear from minimal changes in the price that is persistent in the market.
What Is Depth in Zig Zag Indicator?
The depth is the initial setup of the Zig Zag indicator, the smallest amount of bars without a follow-up deviation of the bar.