What Is the Zig Zag Indicator?

The Zig Zag indicator lowers the impact of random price fluctuations and is used to help identify price trends and changes in price trends.

Understanding the Zig Zag Indicator

The Zig Zag indicator plot points on a chart whenever prices reverse by a 澳洲幸运5开奖号码历史查询:percentage greater🐼 than a pre-ch🦩osen variable. An analyst can set the percentage level to trigge💧r the indicator. Straight lines ar🐽e then drawn, connecting these points.

The indicator is used to help identify price trends. It eliminates random price fluctuations and attempts to show trend changes. Zig Zag lines only appear when there is a price movement between a 澳洲幸运5开奖号码历史查询:swing high and a swing low that is greater than a specified percentage—often 5%. By filte🐓ring minor price movements, the indicator makes trends easier to spot in all time frames.

The Zig Zag indicator is often used in conjunction with 澳洲幸运5开奖号码历史查询: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 澳洲幸运5开奖号码历史查询:securities. 

Although the Zig Zag indicator does not predict future trends, it helps to identify potential 澳洲幸运5开奖号码历史查询:support and resistance zones between plotted swing highs and swing lows. Zig Zag lines can also reveal reversal patterns, i.e. 澳洲幸运5开奖号码历史查询:double bottoms and head and shoulders tops. Traders can use popular technical indicators such as the relative strength ꦅindex (RSI) and the stochastics oscillator to confirm whether the price of a securi🌸ty is overbought or oversold when the Zig Zag line changes direction.

The Zig Zag Indicator Formula

$\begin{aligned} &\text{ZigZag}(\text{HL}, \%change=X, retrace=\text{FALSE},\\ &LastExtreme=\text{TRUE})\\ &\text{If } \%change >=X, \text{plot ZigZag}\\ &\textbf{where:}\\ &\text{HL}=\text{High-Low price series or Closing price series}\\ &\%change=\text{Minimum price movement, in percentage}\\ &Retrace=\text{Is change a retracement of the previous}\\ &\text{move or an absolute change from peak to trough?}\\ &LastExtreme=\text{If the extreme price is the same over}\\ &\text{multiple periods, is the extreme price the first or}\\ &\text{last observation?}\\ \end{aligned}$​ZigZag(HL,%change=X,retrace=FALSE,LastExtreme=TRUE)If %change>=X,plot ZigZagwhere:HL=High-Low&🍎nbsp;price series or Clo𝓡sing price series%change=Minimum p🍃rice movement, i൲n percentageRetrace=Is change a retracement ﷽of the previoౠusmove or an absolute 🌟;change from peak to trough?LastExtreme=If the extreme pℱrice is the samඣe overmultiple periods, is the extreme price the first&nbs🍬p;orlast observation?​

How To Calculate the Zig Zag Indicator

1. Choose a starting point (swing high or swing low).
2. Choose % price movement.
3. Identify next swing high or swing low that differs from the starting point = > % price movement.
4. Draw trendline from starting point to new point.
5. Identify next swing high or swing low that differs from the new point = > % price movement.
6. Draw trendline.
7. Repeat to most recent swing high or swing low.

Zig Zag Indicator Limitations

Like other 澳洲幸运5开奖号码历史查询:trend-following indicators, buy and 澳洲幸运5开奖号码历史查询:sell signals are based on past price history that may not be predictive of future price action. For example, tꦆhe majority of a trend may have already happened when a Zig Zag line finally appears.

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.

Given the lag, many traders use the Zig Zag indicator to confirm the direction 🌳of the trend rather than attempting to time a per♏fect entry or exit.