Zig-Zag indicator

Zig-Zag indicator is a famous indicator (overlapping) represented by lines that connect extreme prices (minimum and maximum).  Zig-Zag measures price changes as percentage and ignores those does not matching certain criterion. In other words, Zig-Zag is a price filter of a particular kind, because it is able to filter insignificant fluctuations of price. Until change for a scheduled percentage takes place, the line moves along with price. When price changes for the value beyond scheduled value , the line takes a reversal into another side. Thus, chart price is formed by curves (zig zag).

Input conditions of the indicator in МТ4 trading terminal 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 market changes and, on the contrary, with larger parameters and with less number of zig zug curves, its sensitivity decreases but length of line will be increased.

Application

Zig Zag is not able to forecast price on its own, because it accounts for an actual (current) movement. However, it still serves as a strong technical tool. At first, it helps to determine market tendency (trend) – ascending or descending extreme points. At second, the indicator is very often used for determining Elliot waves, thereby saving time required for manual building of waves. Many traders and analysts with an experience in Elliot waves and Fibonacci subsequence project future Zig Zug 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.

Conclusion

Zig-Zag indicator is rather descriptive and is often used for market analysis. Zig-Zag has plenty of vantages: filter of price fluctuations, ability to determine trend and the ability to perform 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 price chart.