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The Zig Zag Indicator

A comprehensive informative analysis of market trends is the key to successful trading. The trading income depends on the right timing to open and close positions. Traders have to follow the market with an eye of a hawk to predict its mood.

To predict the market direction, experienced traders employ a wide set of specialized tools. Among dozens of instruments, the popularity belongs to the indicators that allow setting a price channel and seeing a big picture.

However, not all beginners can correctly determine the maximum and minimum prices and connect the values to the market condition. As you know, the market makes many fluctuations: some are significant, and some are not. For example, the majority of a trend may have already happened when a Zig Zag line finally appears.

The Zig Zag Indicator was created to weed out market noise and determine the current trend. You can see it among standard tools in the Pocket Option’ account. It is very simple to use because it follows significant changes and cuts off noise.

Settings and Application Cases

Since Zig Zag is a trend indicator, it is displayed directly on the price chart. It is a broken line that takes into account the maximum and minimum market fluctuations.

This tool is most useful for those traders relying on the Elliott Wave Theory in trading. The indicator displays the overall structure as you open a position at the beginning of the 3rd wave.

Also, as already mentioned above, the indicator helps beginners. They can pre-set a price channel or one other technical tool, if they connect the extreme points of the broken line. A momentum trader might use the indicator to stay in a trade until 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.

Pocket Option terminal offers your two parameters: Depth and Deviation in the settings of the Zig Zag Indicator.

The Depth parameter indicates the number of candles that are taken into account when building the indicator. It is recommended to increase it on lower timeframes and decrease it on higher ones. This approach minimizes market noise. As for the Deviation, it is recommended to leave it at level 5.

How does The Zig Zag Indicator Can Help Traders?

The Zig Zag indicator is often used in conjunction with Elliot Wave Theory to determine the positioning of each wave in the overall cycle. Traders can experiment with different percentage settings to see what gives the best results. For example, a setting of 4% may define waves more clearly than a setting of 5%. Stocks have their own patterns, so it is likely that traders will need to optimize the Zig Zag indicator’s percentage setting to suit those securities.

Using Zig Zag in Trading

First of all, you should remember that Zig Zag indicator is NOT suitable for receiving signals to buy an option because it refers to indicators with redrawing. If you set the “Depth” parameter to 10 and there will be movement into the opposite direction on any of the 10 candles, the  Zig Zag will instantly “adjust” to the current situation.

Traders should be aware the most recent Zig Zag line may not be permanent. When price changes direction, the indicator starts to draw a new line. If that line does not reach the indicator’s percentage setting and the price of the security reverses direction, the line is removed and replaced by an extended Zig Zag line in the trend’s original direction.

We recommend to apply the Zig Zag Indicator in the following cases:

  1. Building a trend line. You need to connect the peaks.

  1. Working with the Elliott Waves. If you look at the chart below you will see the third wave. It’s a right time to find a point of entry into the transaction.

  1. Technical analysis. Due to the fact that the indicator eliminates minor fluctuations, it is easy to find “Head and Shoulders”.

In conclusion, we want to say that even despite the fact that Zig Zag does not signal to buy an option, it is a good advisory tool for those who use Wave Theory and Technical Analysis in trading. By eliminating market noise, traders can accurately determine the current trend and increase percentage of profitable trades.

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