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Zig-Zag indicator is a famous indicator (a technical overlap) represented by lines that connect the extreme prices (minimum and maximum). Zig-Zag indicator measures price changes as percentage and ignores those do not match a certain criterion. In other words, Zig-Zag is a kind of price filters, because it is able to filter insignificant fluctuations of price. Until change for a certain percentage takes place, the line moves along with the price. When the price changes for the value beyond a certain value, the line takes a reversal into another side. Thus, the chart price is formed by curves (zig zag).
Input conditions of the indicator in МТ4 trading platform are following:
ExtDeviation is the minimal number of points between maximum (minimum) points of two neighbor bars put to form a local top (local bottom). Expressed in percentage.
ExtDepth – is the minimal number of bars, on which the indicator won't base its second maximum (minimum) if the last is less (more) than the previous one for ExtDeviation value.
ExtBackstep – is the minimal number of bars between local maximums (minimums).
With smaller parameters and with more number of zig zug curves, the indicator becomes more sensitive to the market changes and, on the contrary, with larger parameters and with less number of Zig Zag curves, its sensitivity decreases. But length of the line will be increased.
Application
Zig Zag indicator in Forex is not able to forecast price on its own because it takes into account the actual (current) movement. However, it is still a strong technical tool. How to use Zig Zag indicator in Forex? At first, it helps to determine the market tendency (trend), ascending and descending extreme points. Secondly, the indicator is very often used for determining Elliot waves, thereby saving time required for the manual building of waves. Many traders and analysts with an experience in Elliot waves and Fibonacci subsequence project future Zig Zag curves on the basis of earlier built by multiplying previous movements to a certain ratio. At third, this indicator is simply used to filter market noise, which diminishes the probability of false actuation of Stop Losses. Many traders apply Zig Zag Forex trading strategy in their trading.
Conclusion
Zig-Zag indicator is rather descriptive and is often used for the market analysis. Zig-Zag has plenty of advantages. It filters the price fluctuations, determines trend and performs as a supplementary tool for analysis. Its main and, perhaps, the only drawback is redrawing of the last line.
* Technical overlap – is a sort of technical indicator, which is overlapped directly on a price chart.
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