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The Zig Zag indicator is a charting tool that plots points and straight lines whenever prices reverse by a percentage greater than a pre-chosen variable. By removing sporadic price changes, it makes the underlying trends more visible.
How Does the Zig Zag Indicator Work?
The Zig Zag indicator operates by contrasting a security's most recent and previous closing prices. It creates a new point and a line linking it to the prior point if the price change exceeds a predetermined threshold (often 5% or more). It ignores and makes no drawings if the price change is less than the required %.Only two sorts of trends can be displayed by the Zig Zag indicator: upward and downward trends. A sequence of higher highs and higher lows indicates an upward trend, whereas a series of lower highs and lower lows indicates a downward trend. The Zig Zag indicator does not reveal horizontal or sideways trends.
Since the Zig Zag indicator is not predictive, it cannot foretell the direction or size of upcoming price changes. It simply displays the past, which has already occurred. As a result, it should be used in conjunction with other trend research tools rather than as a stand-alone trading signal.
How to Use the Zig Zag Indicator?
The Zig Zag indicator can be used for various purposes, such as:- Identifying support and resistance levels: The swing highs and swing lows that could serve as support and resistance areas can be seen using the Zig Zag indicator. In contrast to resistance, which is a price level where sellers are more likely to quit the market, support is a price level where buyers are more likely to enter. To determine entry and exit points, stop-loss orders, and profit objectives, use these levels.
- Identifying chart patterns: The Zig Zag indicator can assist you in identifying popular chart patterns, including as double tops and bottoms, head and shoulders, triangles, flags, wedges, etc., that point to trend reversals or continuations. When these patterns are supported by additional indicators or price movement, they can present trading opportunities.
- Applying Fibonacci analysis: You can use the Zig Zag indicator to apply Fibonacci levels to measure the amount and length of price corrections and extensions inside trends. The Fibonacci levels are based on a mathematical series in which each number equals the sum of the two numbers before it (e.g., 1, 1, 2, 3, 5, 8, 13, etc.). 23.6%, 38.2%, 50%, 61.8%, and 100% are the five most frequent Fibonacci ratios. These ratios can be used to a trend to locate probable turning points or goal levels.
- Applying Elliott Wave analysis: You can use the Zig Zag indicator to apply Elliott Wave theory and find the pattern and cycle of price movements within a trend. According to Elliott Wave theory, market movements consist of five waves in the primary trend's direction (known as impulse waves) and three waves in the opposite direction (called corrective waves). It is possible to divide each wave into smaller waves with a similar pattern. You can identify the waves and establish their relationship and degree with the aid of the Zig Zag indicator.
