ZigZag indicator in Forex
One of the important elements of successful trading is the chart analysis. However, many traders face a problem, sometimes, random price fluctuation distract attention and may result in mistakes. ZigZag indicator provides an unobstructed view of the strong market price swings and helps identify price trends.
A ZigZag pattern in Forex is made of trend lines that connect important extremes in the price chart, which are tops and bottoms. Therefore, this pattern, clearly outlined in the price chart of a trading instrument, indicates important reversal moments of the trend. To see it in the chart, traders use ZigZag indicator as a complementary tool. It is not used for direct price forecasts as it just identifies important trend pivot points, eliminating random price movements within the major trend.
If you have heard about trading strategy based on Elliot waves, you are already familiar with a complementary ZigZag indicator, which allows you to make fewer mistakes in constructing the waves, filtering off random market noises. For example, different traders may draw Elliot waves in the same chart differently. It results from the fact that each trader sees a particular price movement in his/her own way. The ZigZag indicator is applied to even the analysis.
ZigZag indicator is a great technical tool to identify Elliot waves.
ZigZag indicator is available in trading terminal.
Application of ZigZag Indicator, that draws a zigzag pattern in forex, together with other technical tool, like Bollinger bands, for example, is an efficient approach of technical analysis.
The Zig Zag indicator is there to apply consistency to trading signals. This should translate into a more consistent application of other trade strategies. The tool operates, based on a very simple principle. It identifies the most important highs and lows in the chart and connects them with lines, without taking minor price swings into consideration (a similar principle Renko chart is based on). Unlike many other indicators, ZigZag doesn’t predict the future price moves on its own, it just identifies strong price changes in the past. The indicator looks like an angled line, similar to a zigzag (that where the name is from), which is attached to the main chart.
The ZigZag indicator is adjusted according to three settings, let’s see their particular features:
- Deviation variable is the number of pips or points (depending on the market) between two highs or lows of the consecutive candlesticks (or bars, depending on the price chart type). By default, the value is 5%. Therefore, price changes of 5% and more are indicated by a ZigZag line, the movements below this threshold are removed from the trendlines.
- Backstep setting reflects the minimum amount of candlesticks (or bars) between which the high and low can be plotted.
- Depth parameter shows the minimum number of candlesticks, according to which the local extreme won’t be constructed if it is higher or lower of Deviation parameter. It means, that the setting reflects the minimum number of candlesticks with no second maximum or minimum deviation from the candlestick.
You may try different values for the parameters. A change will affect the indicator sensitivity to the price changes. If set lower values, the number of local highs and lows will increase, and so, the indicator will paint more lines.
Based on these settings, ZigZag indicator operates in the following way: after it records the first, lowest point, it is looking for a reversal point until the corrective downward movement doesn’t exceed the set values. As soon as it occurs, the ZigZag indicates the second, highest, point in the price chart. Next, the indicator, according to the same principle, is looking the third point, lowest in the period, and so on, as long as Depth parameter is met. Thus, the angles, drawn by a zigzag pattern in forex, result from price changes by a certain percentage, equal or more than the set values.
Standard ZigZag indicator is the most efficient, combined with other technical tools, for example, fractals, Bollinger bands or Elliot wave formations. In addition to the standard version, there are numerous modifications (you can find them on the form, follow the link at the end of the article), which can enhance the indicator capacities. Unlike many other indicators, ZigZag doesn’t predict anything on its own, it only reflects the price movements in the past. Nevertheless, it is a quite efficient complementary tool to assess the current market situation. This tool is available in almost every popular trading terminal. For example, in MetaTrader 4, it is by default in the User Indicators tab.
ZigZag indicator operates in a way, similar to the price charts like Point and Figure chart, Renko chart and Kagi chart, as it removes random sideways price movements within the main direction, that is, it is a kind of corrective filter. Since random price moves often distract traders from reading the price chart and worsen the quality of market analysis, then ZigZag indicators increase the trading performance.
This indicator has a number of advantages:
- It helps analyze the strongest market trends, eliminating the market noise;
- It can be applied to different timeframes;
- It is easily combined with different tools of technical analysis;
- It is very efficient together with Elliot waves and Fibonacci grid.
When you apply ZigZag indicator, you need to keep in mind that the last section may change, according to the changes of the data analyzed. That is why ZigZag is applied to analyze the price changes in the past. Here are the main drawbacks of ZigZag indicator:
- It is difficult to make an objective forecast (different traders interpret the same phenomena in different ways);
- If you use the standard version of the indicator, it may often repaint the very last section.
The highest profit can be made when trading in the long timeframes. Therefore, it best suites the traders, using long-term trading strategies. Otherwise, there increases the probability of losing trades.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.