Zig Zag

The basic idea behind this indicator is, that all the price swings that are lower than the defined filter, are not taken into consideration. I.e. if we define a filter of 5 % price change, Zig Zag line changes its direction just after the price falls/rises in the opposite direction more than the defined percentage. Any lower price reversals arn't taken into cosideration at all.

Zig Zag can be based on more types of prices. It is usually the Close price, but it can also be calculated at the HL average price or OHLC prices.

How to use the indicator:

Despite the fact that Zig Zag looks very nice when plotted in the price chart, it has many disadvantages. The main one is that is has zero prediction alility. The plotting is just based on historical data and the line changes just after the move is higher than the defined percentage filter. If we want to make some predictions, based on Zig Zag indicator, we should link it to Fibonacci Retracements or Elliot waves.

The main advantage of Zig Zag is that it helps us to identify prevailing trends. The price chart is much easier to read, using Zig Zag indicator. Also the patterns of technical analysis and Elliot waves are much easier to read.

Note: The main advantage of Zig Zag indicator is in its graphic layout, not in its numerical formulation. The numerical representation can be used especially in conjuction with other indicators, or trading systems, e.g. Retracements. If we change the filter from e.g. 5% to 3%, the graphic layout of Zig Zag can change sharply.