Zig Zag Indicator: Definition, How Pattern Is Used, and Formula

zig zag pattern trading

Again, the indicator will draw an opposite line only if the price moves at least 5% the other way. A momentum investor might use the indicator to stay in a trade until zig zag pattern trading the Zig Zag line confirms in the opposite direction. For example, if the investor holds a long position, they would not sell until the Zig Zag line turns downward.

  • By leveraging the strengths of multiple indicators, traders can increase the reliability of their trading decisions and reduce the risk of false signals.
  • Zig Zag is a lagging technical indicator that is moving after the market, now in front of it.
  • The zigzag indicator is an outstanding technical indicator if you’re looking to trade chart patterns.
  • Wave ((a)) here is an impulse, but after wave ((b)) there’s an ending diagonal in wave ((c)).
  • In crypto, the markets are always open and the trading goes on 24/7, so trend lines can only be drawn when there are price fluctuations that meet the trader’s criteria.

The last chart shows a perfect example of an expanded flat pattern. Wave ((B)) is far longer than wave ((A)) and the ending of wave ((C)) breaks the low of wave ((B)). The subsequent bullish impulse in wave ((1)) confirms that a flat pattern is over. The chart shows a simple zigzag in wave (ii) with impulses in waves a and c. Also, pay attention to a leading diagonal, which has formed after wave (ii). As you can see from the chart below, there’re three types of the flat pattern depending on the length of waves B and C.

The Zigzag strategy satisfies all the trading conditions, which mean that we can move forward and outline what the trigger condition for our entry strategy. First, we want to make sure the ZigZag tool will only show the more significant swing high and swing low points in the market. For this, we have to use at least 20 periods for the Depth and 5% deviation to accurately display the market swings. But, if the parameters are set to tight, you can have a zigzagging effect.

Zig Zag Indicator

The pattern tends to be a retracement of the previous trend and may look like a flag pattern. At other times, it may look like a simple range that spends more time going sideways than making any real progress in price. The Zigzag parameters are very important to cover enough price data so the indicator can display zigzag waves on your chart. So, using the zig zag indicator, helps you objectively define these market structures with ease.

The Zig Zag indicator is an excellent indicator in volatile markets such as crypto, because the trend lines are shifting and a trader can know when the trend has ended and starts reversing. The downside is that this is a lagging indicator — the lines are drawn after the trend has shifted. A trader could adjust the Zig Zag indicator to see short term and long term trends. The Zig Zag indicator can be used for short-term bot trades and long-term investments. We can use the zigzag pattern to try to find high percentage areas to ride those waves. This integration provides a more comprehensive analysis of market movements and can help traders anticipate areas of price consolidation or potential trend continuation.

But we want to have a broader view of what the true swing high and swing low are. 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. Backtesting the Zig Zag indicator on historical price data can provide valuable insights into its performance and potential profitability. Incorporating the Zig Zag indicator into a trading plan necessitates the establishment of clear trading rules and risk management strategies. Developing a clear set of rules and guidelines for interpreting Zig Zag signals can help mitigate subjectivity and enhance the consistency of analysis.

ZigZag pattern in Forex

The Zigzag indicator parameters are very important to cover enough price data so the indicator can display zigzag waves on your chart. We will give you an understanding of how to trade with the Zigzag indicator. The markets don’t just move straight up, and they don’t just move straight down. If you spend any more than a couple of seconds in the markets, you may have noticed this before.

The ZigZag technique presented below requires the use of one particular indicator. The Fibonacci retracement and extension will be used to additionally confirm the ABCD harmonic pattern. When you see the ZigZag swings and you want to place a trade, you can do so via derivatives such as CFDs. Derivatives enable you to trade rising as well as declining prices. So, depending on what you think will happen with the asset’s price when one of the ZigZag swings appears, you can open a long position or a short position.

Definition of the Zig Zag Indicator

You should consider using the educational resources we offer like  CAPEX Academy or a demo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader. To get the most out of this guide, it’s recommended to practice putting this ZigZag indicator trading strategy into action. The best risk-free way to test these strategies is with a demo account, which gives you access to our trading platform and $50,000 in virtual funds for you to practice with. Having the zig zag indicator in place, helps you identify when your market structure is invalidated.

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Let’s say a trader wanted to focus on a 20% price movement to determine if it’s a good price to buy or sell. The trader could set the value on the Zig Zag indicator to 20% and they would see when there is a 20% move on the chart. If they want to see smaller price movements such as 5%, they can adjust the indicator accordingly.

The Zig Zag Indicator Formula

Not financial advise and strategy not guaranteed to make money despite backtest results Not created or tested for any specific instrument or… This is an open-source Pine script that generates a Supertrend Zone Pivot Point with Zigzag Fib indicator for TradingView. The indicator displays the Supertrend Zone, pivot points, and Fibonacci levels on the chart.

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Wave C of a flat pattern could be also an ending diagonal as shown on the next chart. However, an ending diagonal in wave (c) finishes below the high of wave (a) that is how running flats ends. As you can see, there’re some variations in each type of flat patterns in the real market. Elliott wave patterns form on all markets, including cryptocurrencies.

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Conversely, when a trend shows signs of exhaustion or a potential reversal, the Zig Zag indicator can signal potential exit points to lock in profits or minimize losses. When the price movement exceeds this threshold, a new line segment is drawn, connecting the previous significant high or low with the current one. We defined new method to derive zigzag last month – which is called Channel-Based-Zigzag . Basic rule of trend following is Buy High and Sell Low (Yes, you heard it right).

zig zag pattern trading

The ZigZag swing trading strategy presented below requires the use of one particular indicator. The Fibonacci extension indicator will be used to additionally confirm the ABCD pattern. The zigzag indicator is one of the default technical indicators that come with your trading platform (MetaTrader4, TradingView, etc.). On the left of the chart, the S&P 500 was forming a triangle consolidation pattern.

And that different types of zig zag indicators use “points” instead of percentages. The Zig Zag indicator plot points on a chart whenever prices reverse by a percentage greater than a pre-chosen variable. The Elliott Wave theory states that the market forms certain psychological sentiment. The sequences are repeated over a certain time period, in different intensities. The Zig Zag indicator can be combined with other indicators to help you plan out your trades.

zig zag pattern trading

This is a common question asked by people who are new to trading and those who have been following the finance industry closely. For example, on the chart above, see the point indicated by an arrow with the notation “moves less than 7% are ignored”. The Zig Zag indicator would initially show a temporary line being drawn upward along with the movement of price.

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