Forex trading with zigzag indicator

Zig Zag.

Zig Zag demonstrates past performance trends and only the most important changes. It filters out all changes less than a specified amount. First, the Zig Zag indicator is used to help you watch changes by highlighting the most essential reversals. Note that the last segment in a Zig Zag chart can change based on changes in the basic plot, where price is just one of the examples.

Do not develop a trading system based on the Zig Zag indicator , as it to be used to highlight historical patterns. A change in a security's price can change the indicator's previous value. As the Zig Zag indicator adjusts its values based on subsequent changes, it has wonderful estimation of previous prices.

To measure the Zig Zag indicator place imaginary points on a chart when prices reverse by at least the specified amount. To connect the imaginary points use straight lines. Then ignore any changes in prices that are below the certain amount.

How do I use the Zig Zag Indicator to create a forex trading strategy?

The Zig Zag indicator 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 is less ambitious than many other technical tools and 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.

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. Too low of a spot results in an ineffective Zig Zag; not enough noise is removed. Too restrictive and you may miss profitable price trend data. Most default settings have the threshold between 8% and 15%.

Trading Forex With the Zig Zag.

This 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 retracements.

The Zig Zag indicator is there to apply consistency to trading signals. 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. It does not predict anything on its own. The forex market is very fast paced, so try to complement it with a system that offers leading signals.

Zig Zag.

The Zig-Zag indicator attempts to determine price trends , support and resistance areas, and classic chart patterns like head and shoulders, double bottoms and double tops. The Zig-Zag indicators uses both swing highs and swing lows in its calculation:

Swing Highs : When a price (usually close) is both higher than the price previous to it and after it. Swing Lows : When a price is both lower than the price prior to it and lower than the price following it.

The Zig-Zag indicator can use both percentages or points in its construction. To construct the Zig-Zag indicator, there must be a certain percentage or number of points between a swing high and a swing low before a line will be drawn. The chart below of the E-mini Nasdaq 100 Futures contract visually illustrates the difference between a price retracement Zig-Zag of 3% and a price retracement Zig-Zag of 5%:

Notice how in the chart above that a Zig-Zag with a retracement percentage of 3% makes more distinct lines than the Zig-Zag with a retracement percentage of 5%. The purpose of using a Zig-Zag with a larger retracement percentage is to help eliminate price noise that is not significant for the trader's analysis.

As will be shown on the next page, the Zig-Zag can be helpful in uncovering stock cycles while screening out short-term price noise .

Zig-Zag indicator.

Zig-Zag indicator is a famous indicator (a technical overlap) represented by lines that connect the extreme prices (minimum and maximum). Zig-Zag indicator measures price changes as percentage and ignores those do not match a certain criterion. In other words, Zig-Zag is a kind of price filters, because it is able to filter insignificant fluctuations of price. Until change for a certain percentage takes place, the line moves along with the price. When the price changes for the value beyond a certain value, the line takes a reversal into another side. Thus, the chart price is formed by curves (zig zag).

Input conditions of the indicator in МТ4 trading platform are following:

ExtDeviation is the minimal number of points between maximum (minimum) points of two neighbor bars put to form a local top (local bottom). Expressed in percentage.

ExtDepth – is the minimal number of bars, on which the indicator won't base its second maximum (minimum) if the last is less (more) than the previous one for ExtDeviation value.

ExtBackstep – is the minimal number of bars between local maximums (minimums).

With smaller parameters and with more number of zig zug curves, the indicator becomes more sensitive to the market changes and, on the contrary, with larger parameters and with less number of Zig Zag curves, its sensitivity decreases. But length of the line will be increased.

Application.

Zig Zag indicator in Forex is not able to forecast price on its own because it takes into account the actual (current) movement. However, it is still a strong technical tool. How to use Zig Zag indicator in Forex? At first, it helps to determine the market tendency (trend), ascending and descending extreme points. Secondly, the indicator is very often used for determining Elliot waves, thereby saving time required for the manual building of waves. Many traders and analysts with an experience in Elliot waves and Fibonacci subsequence project future Zig Zag curves on the basis of earlier built by multiplying previous movements to a certain ratio. At third, this indicator is simply used to filter market noise, which diminishes the probability of false actuation of Stop Losses. Many traders apply Zig Zag Forex trading strategy in their trading.

Conclusion.

Zig-Zag indicator is rather descriptive and is often used for the market analysis. Zig-Zag has plenty of advantages. It filters the price fluctuations, determines trend and performs as a supplementary tool for analysis. Its main and, perhaps, the only drawback is redrawing of the last line.

* Technical overlap – is a sort of technical indicator, which is overlapped directly on a price chart.

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