What is Zig Zag Indicator | How to use this Indicator

In the vast landscape of technical indicators, the Zig Zag indicator stands out for its simplicity and clarity. Rather than predicting future prices, it focuses on filtering out smaller price fluctuations, giving traders a clearer view of the broader market trends. Before diving into its intricacies, let’s first understand what exactly the Zig Zag indicator is.

What is the Zig Zag Indicator?
The Zig Zag indicator is a technical analysis tool that highlights significant trends by drawing straight lines between price pivot points. These lines help visualize the broader market movements by filtering out minor price changes deemed to be “insignificant” based on a predefined percentage or point threshold.

How It Works

1. Filtering Noise: The Zig Zag operates on the principle of filtering out price changes that are below a specified threshold. If price changes are less than the set percentage or point threshold, they’re ignored.
2. Pivot Points: The indicator draws lines between pivot points – which can be highs or lows – giving a clearer picture of market swings and potential reversal points.
3. No Predictive Power: It’s vital to understand that the Zig Zag doesn’t forecast future price movements. It’s a reactive tool, plotting lines based on historical data.

Settings And Adjustments
The primary setting for the Zig Zag indicator is the change threshold, which can be defined in two ways:

1. Percentage: A line is drawn between pivot points when the price has moved a specified percentage from a previous pivot.
2. Points/Price: A line is drawn when the price has moved a specific number of points (or pips in forex) from the last pivot.

By adjusting these settings, traders can make the Zig Zag more or less sensitive to price changes.

Usage In Trading

• Support and Resistance: By connecting the pivot highs and lows, traders can identify potential support and resistance levels.
• Identifying Trends: The Zig Zag can help distinguish between bullish and bearish market trends.
• Spotting Classic Chart Patterns: By filtering out minor fluctuations, the Zig Zag can make it easier to spot classic chart patterns like head and shoulders, double tops, and triangles.
• Harmonic Patterns and Elliott Wave Theory: The clear pivot points provided by the Zig Zag are often used by traders who rely on harmonic patterns or the Elliott Wave theory.

Strengths and Limitations

Strengths:

• Simplicity: It offers a clear visual representation of the market, free from minor fluctuations.
• Versatility: Useful for various trading strategies, including those based on patterns or wave theories.

Limitations:

• Lagging Indicator: Since it’s based on past data and has no predictive power, it’s strictly a descriptive tool.
• Redrawing: The indicator may redraw if a newer high or low surpasses the set threshold, which can be confusing in real-time analysis.

The Zig Zag indicator is a valuable tool for traders seeking clarity in chaotic market conditions. While it doesn’t provide buy or sell signals on its own, its strength lies in simplifying price data, making other aspects of technical analysis more straightforward. As with all indicators, combining the Zig Zag with other tools and analysis methods can enhance its effectiveness and lead to more informed trading decisions.