There are multiple ways to trade with the indicator; trend confirmation, finding support and resistance, and alongside Elliot Wave analysis. To use the indicator, you need to set the percentage of a price move. It means that ZigZag will ignore all the price moves below 5% and only show movement greater than 5%. The indicator isn’t a predictive indicator, meaning you can’t enter or exit positions with ZigZag.
The indicator reacts only to price moves in a certain percentage. Price never moves in one direction; it creates several peaks and troughs. It identifies these highs and lows and tells if the market is reversing. All of this being said, if used properly, the Zigzag Indicator can be an excellent secondary indicator. The market pulled back to the 38.2% Fibonacci retracement level, and then bounced again.
A simple zig zag indicator price action strategy that you can use in both bull and bear markets
The indicator is not so popular among traders, in fact, it is not provided as a default indicator in most trading platforms like the MetaTrader. The ZigZag combination with the Elliott Wave Theory helps traders determine the positioning of each wave in the overall cycle. Traders can experiment with different percentage settings to see what gives the best results. For example, a setting of 4% may define waves more clearly than a setting of 5%.
- For example, the majority of a trend may have already happened when a Zig Zag line finally appears.
- Chartists can also use the ZigZag with retracements feature to identify Fibonacci retracements and projections.
- It does help eliminate a lot of the noisy conditions that are typically found in a trend and focuses solely on the overall directionality of that move.
- It is important to remember that the ZigZag feature has no predictive power because it draws lines based on hindsight.
A momentum investor might use the indicator to stay in a trade until the Zig Zag line confirms in the opposite direction. For example, if the investor holds a long position, they would not sell until the Zig Zag line turns downward. Higher highs and higher lows mean that there’s an uptrend, while lower highs and lower lows are typical for a downtrend. Deviation is the minimal distance (in %) between the highs and the lows of the 2 consecutive candlesticks that will make the indicator form a local top or bottom.
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Stocks have their own patterns, so it is likely that traders will need to optimize the ZigZag indicator’s percentage setting to suit those currency pairs. Given the lag, many traders use the Zig Zag indicator to confirm the direction of the trend rather than attempting to time a perfect entry or exit. Traders should be aware the most recent Zig Zag line may not be permanent. When price changes direction, the indicator starts to draw a new line.
- Assuming that the zig zag indicator you are using would be the percentage-based indicator.
- Having the zig zag indicator in place, helps you identify when your market structure is invalidated.
- Whether you’re learning how to be a price action trader or an Elliot Wave trader, the zig zag indicator is an essential tool.
- Traders can experiment with different percentage settings to see what gives the best results.
The zigzag indicator is one of the default technical indicators that come with your trading platform offered by the best CFD & Forex brokers. The Zigzag parameters are very important to cover enough price data so the indicator can display zigzag waves on your chart. The ZigZag indicator is a technical indicator that lowers the impact of random price fluctuations and is used to help identify price trends and changes in price trends. The ZigZag and ZigZag (Retrace.) can be found in SharpCharts as a price overlay in the Chart Attributes section or as an addition to an indicator. Upon selecting the ZigZag feature from the dropdown box, the parameters window will appear empty. Five (5%) is the default parameter, but this can change depending on a security’s price characteristics.
How To Calculate the Zig Zag Indicator
If the ZigZag plots a line, and the Elliot Wave analysis points out in the same direction, then it’s a trend confirmation. The chart above shows how the indicator plotted the trend line at the start of each move. The easiest to use ZigZag is to find out the direction of the trend.
The zig zag indicator is often used as a trend reversal indicator. You’ve learned how the zig zag indicator can help you out in trading and also what not to do when using the indicator. Assuming that the zig zag indicator you are using would be the percentage-based indicator. Because the more consistent you are on which timeframe you trade on, the more effective the zig zag indicator would be for you. The zig zag indicator is still a simple trading tool that’s easy to understand. A zig zag indicator is still a trading tool at the end of the day.
High-Low-Close bars (HLC), Open-High-Low-Close (OHLC) bars and candlesticks, which show the period’s high-low range, will show the ZigZag based on this high-low range. A ZigZag based on the high-low range is more likely to change course than a ZigZag based on the close because the high-low range will be much larger and produce bigger swings. The key is to always trade in the direction of the trend, or appropriate to the current market condition.
Final words about the ZigZag indicator
For example, when you add the deviation, the lines will be spread relatively more. The chart below shows the same chart as above but with the deviation at 10. However, when you trade with the Zig Zag indicator, you’re able to capture two or even three times more of the risk taken. The reason why we use the Fibonacci extension levels is to try to anticipate where the last swing wave of the Zig Zag combination will form. In order to plot the Fibonacci Extension line, we need three points of reference. As soon as the first two waves of the ZigZag pattern are developed, we’re offered three swing levels.
The August decline (Line 2) retraced around 61.8% of the June-July advance (Line 1). The advance from early September to early November was 1.646 times the August decline. In this sense, the ZigZag (Retrace.) can be used to project the length of an advance. Again, 1.646 is close to the Fibonacci 1.618, which is the Golden Ratio used in many projection estimates.
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To add the ZigZag indicator to a chart, click “Insert”, choose “Indicators” and then “Custom”. You will then be able to pick out “ZigZag”.The indicator has 3 parameters. When the price reaches the support, you buy, and when it reaches the resistance level, you sell. The ZigZag helps locate the top and the bottom, showing the support and resistance level.