Zigzag indicator description
When analyzing price movements on a chart while trading on Forex, a trader can get interfered by minor price fluctuations: the market noise. It’s difficult for him to see really significant trends and a false forecast can be made easily.
This indicator for Forex (fig. 1) allows you to cut off price noise and more accurately identify the key trend and significant price changes, reversals and other important changes in the trend. In general, ZigZag indicator enables you to more effectively assess the market situation (the whole truth about Forex).
In particular, it makes the construction of trend lines, search for support and resistance levels easier, shows prices bounce off levels. Traders, based on ZigZag information, look for Forex signals of the mark for buying and selling (Forex trading training). At the same time, ZigZag notes price changes in the past – based on this information, a trader can get more accurate Forex market forecasts. However, ZigZag is rarely used as a standalone tool, being an additional indicator to other tools, including the oscillators for Forex.
How does ZigZag work? The indicator highlights the most significant higher and lower points of the price and connects them with straight lines. Thus, unnecessary minor fluctuations can be ignored by the trader. The indicator looks like a broken line put over the main chart. When working with it, the value of price fluctuation is taken as an estimate, fluctuations outside this value are filtered out. For example, if the filter value is 10%, anything less than 10% won’t be marked since it will be considered as irrelevant.
The trader should closely follow the indicator’s behavior, since its last line may change when the tracked data changes. This is one of its drawbacks. For example, it marks the lower extreme, but if the trend remains downward, the indicator shifts the line below and the indicators are redrawn. If the trend changes to upward, the indicator marks the upper extreme and redraws the indicators again. Because of this feature, ZigZag is advisable to use on timeframes from 1 hour and more.
ZigZag has three parameters: Deviation, Depth, Backtep. Let’s talk about them in detail.
- Deviation is the percentage of the minimum number of points between the extremes of two adjacent candles. This value is most often 5%. This parameter forms local extremes. That is, price movements of 5% and above are marked by the indicator, smaller values are cut off.
- Depth shows the required minimum number of candles to determine extremes. The lower this value, the more responsive the indicator, accordingly.
- Backstep shows the minimum amount between minima and maxima.
Changing the parameters of the indicator affects the sensitivity of the instrument: if the parameters are reduced, the indicator will show more lines, displaying more extreme points. The preset parameters of the instrument are correct enough and it’s not recommendable to change them.
ZigZag indicator advantages
ZigZag indicator is used in combination with other technical analysis tools, which is how it becomes most effective. Often it’s used in Elliott wave strategies using the Bollinger bands, Fibonacci levels to determine standard patterns. For example, this is the «bottom-correction-rebound» (1-2-3) trend pattern, which is formed at the end of the trend and indicates a change in trend. This pattern is easy to determine using ZigZag and allows you to predict the entry point to trading with great accuracy.
ZigZag is most used by traders who hold on to the Elliott’s theory, since it helps to identify Elliott waves without plotting them on a chart. The main price movement, according to Elliott’s theory, is a pulse wave in the direction of the trend, alternating with corrections. ZigZag allows you to determine the first wave of momentum and enter the trading under optimal conditions.
ZigZag is often used together with Bollinger bands following a fairly simple method. If Bollinger bands angular bending occurs on an uptrend, then a line is drawn from the previous ZigZag top through the lower Bollinger bending point until it touches the lower line. The indicator allows to determine the appropriate entry point for the purchase of an asset.
ZigZag indicator in MetaTrader 5 platform
ZigZag is a popular trading tool. For instance, in the terminal it is under the tab «User’s». To download it to the chart you need to go to the tab «Insert», scroll down, go to «User’s» and find the indicator in the pop-down menu. Or you can do it clicking on the basic tool list on the left from the chart, the tab «Examples»:
After you click it, the indicator customization window appears, with the default Deviation — 5, Depth — 12, Backstep — 3, here you can also change the timeframe and indicator color. Leaving these parameters or setting yours, you can download ZigZag to the chart:
ZigZag-based trading strategies
Although ZigZag is used with other indicators, there are strategies in which only it is used. With its help, the minimum is marked on the chart, which then must be confirmed by two candles or more according to the trend. This can be a signal to buy an asset at stop loss up to 10 points below the minimum.
For a signal to sell, you need to set a maximum confirmed by several candles: the entrance is made with a stop loss up to 10 points above the maximum. Trading on timeframes of 15 minutes is preferable. Although seeming to be simple, this strategy is not often used, since only one indicator is not enough for full-fledged trading, especially that the indicator gets lagged. Anyway, the trading with ZigZag only is also possible. The same can be said about the ZigZag indicator-breakdown strategy, also implying stop losses. As part of it, positions are opened on the breakdown of extremes, stop losses are set up to 15 points higher or lower depending on the purchase or sale of an asset.
The ZigZag’s ability to simplify the determination of basic price movements is used in strategies related to the construction of patterns on the chart. For example, with ZigZag, one of the basic graphic figures is built: a triangle. For this, ZigZag defines two upper and two lower points so that the upper point is lower than the first point, the second lower point is higher than the first point. Trades are opened for the breakdown at the point of the forecasted breakdown by the price of the pattern boundaries, both for sale and for purchase.
One of the popular strategies is trading on signals ZigZag and moving average. The purchase is opened when ZigZag crosses the moving average from bottom to top and the indicator by the maximum indicator immediately after the minimum. A sell transaction is opened when the indicator shows the first minimum after the maximum at the intersection of ZigZag moving average from top to bottom. In this strategy, stop losses have to be used, placed up to 40 points depending on the trend.
The Elliott’s wave trading strategy using ZigZag involves defining the main waves. The main waves A and C go in the direction of the key trend with correctional movements B and D. The sell order is opened immediately after the completion of the B-C correction before the D impulse. In strategies with Elliott waves, the Fibonacci grid is often used, allowing to specify the corrective movement of the waves and open a deal formed trend. In addition, ZigZag in the wave strategy can confirm the trend reversal after the correction is completed.
In the framework of the strategy where ZigZag, Fibonacci and MACD are used, the entry point into trades against the trend or the entry point at the turn is determined as accurately as possible. The indicator shows price movements, the Fibonacci grid is superimposed on the waves according to which the price moves, and the MACD indicator shows divergences and convergences that mark the end of the current trend.
This strategy first determines the price movement according to ZigZag. If it indicates a trend change, then the price wave according to ZigZag is determined and Fibonacci is superimposed on it. Trading positions are opened on Fibonacci levels in the direction indicated by ZigZag. This strategy also involves the use of stop losses. This strategy is believed to be fairly universal, providing for its use in almost any market situation, including when the flat trend prevails, although the trading efficiency is higher in a volatile market, since in such case there are more signals.
The long-term strategy, where ZigZag indicator is applied together with Stochastic or RSI indicators, is intended to determine the correction after a trend reversal and after leaving a flat. Additional indicators should show overbuy and oversell zones to determine the beginning of a possible trend change. The trader determines new extremes and opens deals to sell or buy, depending on the emerging trend. Transactions are closed only when the indicators show the next trend change. This strategy is carried out with the support of stop losses.
ZigZag indicator is also used in Williams strategies, the instruments of which are on the standard lists in trading terminals. As part of these strategies the indicators Alligator (fig. 4), АС (Acceleration/Deceleration) and Awesome Oscillator are used:
The trader notes the Alligator indicator patterns: if the pattern is above three lines of indicators, it’s a buy signal, whereas if it is lower, it’s a sell signal. Indicators Awesome Oscillator and Acceleration/Deceleration confirm the signals of the previous indicators by the color and position of the oscillator, for example, green and above zero confirms the buy signal. In this strategy, ZigZag allows to cut off market noise and quickly assess the trend reversal.
The ZigZag indicator is successfully used in a number of strategies. Its main objective is to clarify the trend movements, cutting off unnecessary signals and thereby increasing the accuracy of forecasts. However, it’s not predictable itself, since it analyzes only past price movements and, moreover, redraws the latest data. Therefore, it’s used in combination with other indicators and trading tools.