The Zig Zag indicator is a trading tool used by forex traders to analyze the forex market for trend reversals. It can help to determine key support and resistance levels along with significant changes in price action whilst also filtering out short-term fluctuations. The Zig Zag indicator can help to eliminate the noise that can occur every day in various market conditions. Whilst not always a common technical indicator included within trading platforms, you can download the Zig Zag indicator for free to use in popular platforms such as MetaTrader.
What is the Zig Zag indicator?
The Zig Zag indicator tries to identify price trends, areas of support and resistance, as well as classic price action patterns such as head and shoulders, double bottoms and double tops.
Zig Zag indicators use both maximums and minimums of oscillations in their calculations:
- Maximum fluctuations: when the price (usually close) is higher than the price before and after it.
- Swing lows: when the price is lower than the price before it, and lower than the price following it.
The zigzag indicator can use both percentages and points during construction. To build a Zig Zag indicator, there must be a certain percentage or number of points between the maximum and minimum fluctuations before a line is drawn.
How to use the Zig Zag indicator?
The Zig Zag indicator can be most effective when working on long-term timeframes. This is where clear trend movements appear most of times. As the name suggests, the indicator looks like a set of Zig Zag lines on the chart that combine local highs and lows to form a corridor that enables the trader to conduct analysis on further price movement.
Practice shows that, despite its usefulness, a comprehensive strategy that incorporates the principles of the Zig Zag indicator as a filter, can be more effective. Most often, traders supplement this tool with common free indicators such as moving averages, Stochastic Oscillator, relative strength index, average directional index and the Ichimoku Kinko Hyo.
Alternatively, you can choose Elliott waves, Bollinger bands, and Fibonacci levels as the basis of the trend strategy. The latter has a separate name “Rook” or a trading strategy for two Zig Zags. The choice of components utilised within the trading strategy is determined by the trader’s individual goals and personal preferences.
Zig Zag indicator trading strategy
The Zig Zag indicator is calculated by placing imaginary points on the chart when prices reverse by at least the specified amount. Straight lines are then drawn to connect these imaginary points.
The Zig Zag indicator is a basic tool that analysts use to analyze the price action of a security to spot trends and patterns. It helps in spotting price swing points which act as support and resistance areas, and thus, helps in filtering out irrelevant price swings or fluctuations that may constitute noise at best. However, the indicator may not be useful in real-time trading, as it lags a lot and repaints.
When you apply a Zigzag indicator to a chart, it clears up a lot of the noise over the longer term moves, thereby making it much more effective on longer-term charts than shorter-term charts. It is shown by a simple line on the chart that almost looks like a trend line, but it doesn’t pay attention to the highs and lows of a specific set of candlesticks. It simply draws out the trend.
The combination of a moving average with a period 100 along with the Zig Zag indicator forms a simple trading system. Such simple signals to enter the market can be used by beginners who are learning how to trade forex online.
Zig Zag indicator buy signal
- Zig Zag should identify a new high.
- The Zig Zag crosses the moving average from bottom to top, while the market entry is not immediately after the intersection, but at the opening of the next candle.
Zig Zag indicator sell signal
- A new low is formed.
- Zig Zag crosses the moving average from top to bottom.
Double Zig Zag strategy
By definition, a double Zig Zag is formed out of,two Zig Zag. We know by now that a Zig Zag is a simple correction that is labelled with letters, a–b–c, and that the a and c waves are impulsive waves. A double Zig Zag, therefore, will have four different impulsive waves in the same direction, which are connected by small corrections. What’s different about the double zig zag indicator is that it makes use of two different settings when plotting its values. The basic idea behind the double zig zag indicator is to ensure that it does not repaint like the Zig Zag indicator on its own can.
The primary purpose of using the double zig zag indicator is to identify potential areas of support and resistance. Due to the fact that the turning points are plotted after price moves or retraces significantly from the low or the high, these areas can provide future reference points of how price can behave. By using two zig zag settings, traders are able to view the short term changes as well as the long term changes in price.
Zig Zag indicator conclusion
The zig zag indicator is an effective tool for analyzing historical data. It is only based on hindsight and is not predictive in any way. It is based on the past prices of securities and cannot forecast the next swing highs and swing lows. Even though the zig zag indicator is not predictive, it is still very useful.
Given all this, we can say that the Zig Zag indicator can simplify trading for traders who work with Elliott waves, divergence or use other similar forex trading strategies. In this case, the trend analysis performed by these indicators can help traders to predict potential market trends and reversals.
Unfortunately, the Zig Zag indicator is far from suitable for every situation. For short time trading it does not always provide accurate signals due to market noise. I personally prefer to trade using the default indicator settings on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower timeframes 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.
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