The zig zag indicator is a basic tool used by analysts to find out when a security’s trend is reversing. Determining the support and resistance areas helps to identify significant changes in price while filtering out short-term fluctuations. This eliminates the noise of everyday market conditions.
Key Takeaways
- A zig zag indicator can tell analysts when a security’s trend is reversing.
- The indicator requires a percentage of price movements. The default is usually set at 5%.
- A zig zag indicator isn’t predictive. It’s based on past events.
- The closing prices of securities are normally used.
The Zig Zag Indicator
A percentage of price movements must be set to use the zig zag indicator. The default value for a zig zag is 5% but a setting of 9% would ensure that only price fluctuations of 9% or more would be shown in the chart.
Important
Using a higher percentage eliminates smaller price swings and allows the analyst to see the bigger picture.
How the Zig Zag Indicator Is Used
The zig zag indicator is an excellent tool for any trader who follows indicators that use swing highs and swing lows.
Closing prices of securities are normally used and imaginary points are placed on the given chart where the price reverses by the set percentages. These points are then connected by straight lines and the required information appears.
What Are Swing Highs and Lows?
A swing is indicated by two higher lows and two higher highs in the price action of a security or by two lower highs and two lower lows. The first swing is always followed by one in the opposite direction or by a lateral move with no significant change. Being able to identify swings can improve a trader’s odds of success.
What Can Cause a Security’s Trend to Reverse?
Any number of factors can cause a security’s trend to begin moving in the opposite direction from high to low or vice versa. You can identify them after the fact with the assistance of any number of patterns and indicators, but some events can signal an oncoming reversal. They typically include volatile news events that can affect trader sentiment and hitches in supply and demand.
What Are Elliott Wave Counts?
Ralph Nelson Elliot created the Elliott Wave Theory in the 1930s. His premise was that the market could be tracked and ultimately predicted by a pattern of five waves in the direction of a security’s trending price movements. Market corrections are based on a pattern of three waves. Using Elliott’s waves to analyze market conditions can be a tricky and difficult challenge but numerous tools are available to assist you.
The Bottom Line
The zig zag indicator is an effective tool for analyzing historical data. It’s only based on hindsight and it isn’t predictive in any way. It uses the past prices of securities. It can’t forecast the next swing highs and swing lows.
But it’s still very useful. It’s often used in conjunction with applications such as Elliott wave counts. Analysts can also use the historical highs and lows to draw lines to identify Fibonacci projections and retracements. Chart patterns such as double bottoms, double tops, and head and shoulders can also be determined.
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