What Is The Zigzag Indicator?

How the Zigzag indicator works?

A trader can see Zigzag lines only when there is a price movement between a swing highs and swing lows. Generally, the indicator lines will appear only when there is a price movement more than a certain percentage, say 5%. It helps traders in identifying trends by reducing irrelevant price changes in charts in all the time frames.

How to calculate the ZigZag indicator?

There are mainly three parameters based on which Zigzag indicator is calculated. These parameters and calculations are as follows:

Fix price level. To set the percentage-based threshold, traders need to choose a percentage value, such as 5%. It means the indicator will only consider price movements exceeding 5% as significant. Alternatively, for a fixed value threshold, you specify a specific price amount, like $1. If the price moves more than $1, the ZigZag indicator will recognize it as significant.

Depth. Depth refers to how significant a price movement must be before the ZigZag indicator draws a line. For example, if you set the depth at 10 points, the indicator will only draw lines when the price moves at least 10 points in the chosen direction.

Retrace. The retrace parameter determines the percentage or value by which the price must retrace from a significant high or low before a new ZigZag line is drawn. If you set the retrace value at 5%, it means the price must retrace 5% from the last significant high or low before a new line is drawn.

Pros and cons for using a Zigzag indicator

The primary advantage of using the Zigzag indicator is that it is highly effective in making quick decision making by letting traders know about the right potential market trends. Traders don’t have to consider the minor price fluctuations that might be random.

However, there are two primary cons that a trader has to consider when using a Zigzag indicator. These are as follows:

Redraws trend lines

If the price continues to move after a line is drawn, it might decide to redraw that line which can be confusing and might lead to making wrong trading decisions.

Not a standalone tool

While the ZigZag indicator is helpful, it's not a magic solution by itself. To make well-informed trading decisions, it's often best to combine it with other technical analysis tools and indicators.

What is the ZigZag indicator used for?

There are mainly three reasons to use Zigzag indicators as a primary tool for traders. These are as follows:

Zigzag indicator for trend identification

It draws lines on the chart that follow the direction of the price movement, making it easy to spot whether the market is going up or down.

Zigzag indicator for trend reversal identification

When the ZigZag lines change direction, it signals that there might be a shift in the market's momentum. It is valuable information for traders looking to time their entries and exits.

Zigzag indicator for support and resistance identification

These are price points where the market often reacts. The ZigZag indicator highlights these levels by connecting significant highs and lows, which can be useful for making trading decisions.