Trader Tip: Zig Zag Indicator In previous posts you have heard me rant about how I really do not like these chart indicators the many traders love. Primarily because most of these chart indicators, are “price derived” and hence can be lagging – getting you in and out of the market early and/or too late. But here’s one that I do like – one of my favorites. It is called the Zig Zag (ZigZag) indicator. Why? The ZigZag indicator, can be a very forward-looking indicator if used correctly. In the post, we will explore its use more.
First off, if you have never heard of the ZigZag indicator here is a brief description. The ZigZag indicator is not an indicator per se, but rather a means to filter out smaller price movements to see trends. The ZigZag is a series of trendlines that connect the tops and bottoms of significant prices (swing highs and lows). Trend Change criteria is defined using the indicator’s minimum percent change parameter. Most ZigZag indicators have three settings as follows:
- Depth – how far back in the chart bar series it will look. Try to gauge the number of time periods we see in chart price harmonics.
- Deviation – percentage deviation before it reverses trend – a Zig turns into a Zag. Size this to find the happy medium for the “reasonable” swing highs and lows.
- Backstep – the minimal amount of bars between swing highs and lows. Note, keep this high to filter out transient spikes.
Looking first at the adjacent thumbnail chart (click chart to enlarge), we can see a few “bad” cases for the ZigZag indicator. No successive swing point highs or lows, irregular waves and a choppy looking jagged mess (indicating the parameter settings on the indicator perhaps are set too tight, though one can also set them too wide). So what should we be looking for in the ZigZag indicator? Here here is my short list, though this does not discount this being used in conjunction with other technical indicators.
- Symmetry – nice evenly match waves harmonics – no irregular patterns of sudden moves and price spikes.
- Wave depth – good cyclical depth waves to allow us to get in on a trend at good prices.
- Stepping price levels – the best idea is when you see the ZigZag indicator starting to make higher highs and high lows (for the long case, the opposite for the short case).
In this adjacent thumbnail chart (click chart to enlarge), we can see the above “good” cases being playing out. It will require some skill and practice to work out “good” and “bad” ZigZag patterns, but this should get you started. The reason I said from the beginning that this can be a forward-looking chart indicator, is because we can see Trigger target areas many bars in advance, if we were to enter in on a ZigZag wave pull back on a good trend definition. Once we can establish these “good” ZigZag patterns we can start building a Trade Plan around this. Click here for a Trade Plan that can do just that.
The suggestion is to place this on your chart with a very light color to just lightly aid in the identification of these swing high and low points – but don’t clutter your chart with dozens of indicators that are not used (or even partially used). They may cause you to make a silly trade, due to a dubious bright idea gone wrong. Click here, or watch below a video presentation of this Trader Tip.
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