The Zig Zag indicator is a trading tool used by forex traders to analyze the forex market for trend reversals. It can help to determine key support and resistance levels along with significant changes in price action whilst also filtering out short-term fluctuations. The Zig Zag indicator can help to eliminate the noise that can occur every day in various market conditions. Whilst not always a common technical indicator included within trading platforms, you can download the Zig Zag indicator for free to use in popular platforms such as MetaTrader.
What is the Zig Zag indicator?
The Zig Zag indicator tries to identify price trends, areas of support and resistance, as well as classic price action patterns such as head and shoulders, double bottoms and double tops.
Zig Zag indicators use both maximums and minimums of oscillations in their calculations:
- Maximum fluctuations: when the price (usually close) is higher than the price before and after it.
- Swing lows: when the price is lower than the price before it, and lower than the price following it.
The zigzag indicator can use both percentages and points during construction. To build a Zig Zag indicator, there must be a certain percentage or number of points between the maximum and minimum fluctuations before a line is drawn.
How to use the Zig Zag indicator?
The Zig Zag indicator can be most effective when working on long-term timeframes. This is where clear trend movements appear most of times. As the name suggests, the indicator looks like a set of Zig Zag lines on the chart that combine local highs and lows to form a corridor that enables the trader to conduct analysis on further price movement.
Practice shows that, despite its usefulness, a comprehensive strategy that incorporates the principles of the Zig Zag indicator as a filter, can be more effective. Most often, traders supplement this tool with common free indicators such as moving averages, stochastic oscillator, relative strength index, average directional index and the Ichimoku Kinko Hyo.
Alternatively, you can choose Elliott waves, Bollinger bands, and Fibonacci levels as the basis of the trend strategy. The latter has a separate name “Rook” or a trading strategy for two Zig Zags. The choice of components utilised within the trading strategy is determined by the trader’s individual goals and personal preferences.
Zig Zag indicator trading strategy
The combination of a moving average with a period 100 along with the Zig Zag indicator forms a simple trading system. Such simple signals to enter the market can be used by beginners who are learning how to trade forex online.
Zig Zag indicator buy signal
- Zig Zag should identify a new high.
- The Zig Zag crosses the moving average from bottom to top, while the market entry is not immediately after the intersection, but at the opening of the next candle.
Zig Zag indicator sell signal
- A new low is formed.
- Zig Zag crosses the moving average from top to bottom.
Zig Zag indicator conclusion
Given all this, we can say that the Zig Zag indicator can simplify trading for traders who work with Elliott waves, divergence or use other similar forex trading strategies. In this case, the trend analysis performed by these indicators can help traders to predict potential market trends and reversals.
Unfortunately, the Zig Zag indicator is far from suitable for every situation. For short time trading it does not always provide accurate signals due to market noise. I personally prefer to trade using the default indicator settings on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower timeframes and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The methods of implementing the Zig Zag indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Zig Zag indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.