Zig Zag Indicator: About, Strategy, Settings, Formula & Limitations

Zig Zag Indicator
Source: investopedia.com

Forex trade has become popular than ever before. Many people are now going into forex, with some making millions in the forex market, while others are losing their hard-earned money in the forex market due to its volatile nature.

Many tools and AI robots that give forex signals have been developed. One of such tools is the Zigzag indicator and we’ll be taking you through the basic things you need to know about Zig Zag Indicator.

 

About Zig Zag Indicator

A Zig Zag indicator is a tool that indicates and gives you a complete view of the forex market prices on some different time frames with a zigzag pattern. You can swing trade and do any type of trade you want to do.

If you notice the movement of markets and prices, you will see that markets don’t move straight up and they don’t move down straight. Price swings up and down in a zigzag pattern.

The Zig Zag indicator is one of the few technical indicators that measures the high swings and the low swings in the market. With the measurement, you can know accurately the market low and high points so that you can know what you will trade in the market.

The zigzag tool filters noise in the market and clear your doubts.

 

Zig Zag Indicator Strategy

The most interesting feature of the Zig Zag indicator is the ability of the tool to filter out little price movements that happen with a trend (noise).

The zigzag indicator helps traders to maintain a steady and profitable position throughout a particular trade trend.

The Zig Zag indicator create lines or pattern of trends on a chart. Adjustment is only made when the movement of above 5% is made. The Zig Zag indicator will never register or indicate any little fluctuation in price that is less than 5%.

 

Zig Zag Indicator Settings

I will tell you the settings you need to do so that you can set up your Zig Zag tool for trading.

The steps are listed below:

First, set the Zigzag indicator setting at 20depth and 5% deviation. This is important because we want to be sure that the ZigZag tool shows us the most serious high swing and the swing low points in the forex market.

This is because we have to use a minimum of 20 trading periods for the Depth and 5% deviation so we can see accurately the full display of the swings in the market.

ZigZag Indicator Settings at 20 for The Depth and 5% Deviation

First, we want to make sure the ZigZag tool only shows us the more significant swing high and swing low points in the market. For this, we have to use at least 20 periods for the Depth and 5% deviation to accurately display the market swings.

  • Plot the Fibonacci line once you see that the first two swings are fully established. You need just 3 reference points before you can plot or draw the Fibonacci extension line.
  • As soon as the first two swings are established, you will see three reference points we will use in drawing our Fibonacci extension line.

The Zig Zag indicator will only help us to mark the swing low that it is formed too late for you to use and base your trades on it. It will help us to know when the zigzag pattern is about to end.

  • Wait for the 3rd swing to stop between 0.618 to 0.786 or 1.0 to 1.272. Since we don’t know when a particular trend will terminate, we are going to use the step#4 method to spot the next swing point in the market.
  • Wait till you have a candle with a little bit higher low on the right side and the left side. The bar from the right must break above the bar on the left side.

With this 3 bar pattern, you can spot the next market swing point easily.

You just need to wait till you have a candle that has a higher low on the left and the right-hand side. For us to confirm this three-bar pattern we also need the bar that is at the right side to break above the high of the left bar.

 

Zig Zag Indicator Formula

ZigZag (HL,% change=X, retrace=FALSE,

Last Extreme = TRUE)

If % change>=X, plot ZigZag

where:

  • HL = High-Low price series or Closing price series
  • %change = Minimum price movement, in percentage
  • Retrace = Is change a retracement of the previous move or an absolute change from peak to trough?
  • Last Extreme = If the extreme price is the same over multiple periods, is the extreme price the first or last observation?

Source: investopedia.com

 

How To Calculate the Zig Zag Indicator

  1. Select a starting point (swing high or swing low).
  2. Select % price movement.
  3. Identify the next swing high or swing low that differs from the starting point = > % price movement.
  4. Draw trendline from starting point to new point.
  5. Identify the next swing high or swing low that differs from the new point = > % price movement.
  6. Draw trendline.
  7. Repeat to most recent swing high or swing low.

 

Zig Zag Indicator Limitations

Similar to other trend-following indicators like Aligator Indicator, CCT indicator, MACD, etc., buy and sell signals depend on the past price history that may not be predictive of future price action. For instance, an integral part of a trend may have already occurred when a Zig Zag line finally appears.

Traders should note that the most current Zig Zag line may not be permanent. When the price changes direction, the zig zag indicator begins to draw a new line.

If that line does not get to the indicator’s percentage setting and the price of the security changes direction, the line is removed and substituted by an extended Zig Zag line in the trend’s original direction.

With these in mind, many traders use the Zig Zag indicator to check the direction of the trend instead of trying to time a perfect entry or exit.

 

Questions and Answers about Zigzag Indicator

There are some questions you might have about some terms In Zig Zag which you might not have heard before.

  1. Depth: Depth in Zig Zag indicator means how far in the chart bar it will look like
  2. Deviation: this means the percentage of deviation before the trend is reversed and a Zig becomes a Zag.

 

Other Trading Indicators

There are other trading indicators apart from Zig Zag indicators they are CCI, Willam fracture alligator, MACD signal. We are going to discuss briefly some of them.

Alligator indicator

The Alligator indicator is another trading indicator you need to know about. The alligator indicator works by drawing different Moving Averages (MAs) on a bar chart. The alligator indicator has an alligator shape. It has 3 averages that are always moving. It has 3 colours, and each colour has its own representation of a part of an alligator animal and its connotative meaning.

The blue line represents the Jaw of the alligator, the red line represents the teeth and the green line represents the lips. These 3 colours are the only customized colours on the trading platform.

The colours are explained below:

When the alligator’s lips, teeth, and jaw are closed (which is when the moving average lines are intersected) it means the indicator Is tired or is on recess. That is the major reason most forex traders are always taking a position like that in the market because it is a weak trend.

Some traders like closing their position whenever they are making profits, this is when the alligator uncrosses its lines by opening its jaw and moving forward and backward.

CCI indication

This stands for Commodity Channel Index is a forex indicator that measured the existing price level relative to the average price level over some time. The CCI has a momentum oscillator which makes the CCI identify overbought and oversold levels for you.

William Fractal

This is a forex trade indicator that was created and built by a man named Bill Willams which enables you to detect the reverse points (high and low swings in the market trend) with pointers. Up fractal and down fractals have different shapes that have marks that differentiate them. The William Fractal helps its users determine the direction of the price will move in the future.

MACD

Moving average convergence divergence (MACD) is an indicator that follows trend momentum. It shows the relationship between two moving security prices. You can buy when the MACD crosses over its signal line and sell when the MACD crosses below the signal line

 

Conclusion

In conclusion, you have seen how you can trade forex with the Zig Zag indicator. It gives a complete view of the market at a particular time. It shows you the future analysis and indication of the future movements in the forex market

You can also try the alternative forex indicators like CCI and William Fracture indicators that will help you with the future indication of prices so that you can make profits from your forex trading.

You should note that Forex is a very risky business which means you have to be careful while trading with any of the indicators in this post. Make sure you have a comprehensive technical analysis before you trade using any indicator so as not to lose all your trades due to your ignorance of the market trends or forex indicators.

Also, don’t put all your eggs in one basket, always trade with the amount of money you can afford to lose so that you wouldn’t end up in debt.

Lastly, do check out the blog page for more articles like this.

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