If you are involved in trading, you have probably heard about many indicators that help analyze the market. One of these tools is the Zigzag indicator. It is simple but effective, and helps traders find key points on the chart. In this article, we will analyze what this indicator is, how it works, and how it can be used in trading.
The Zigzag indicator is a technical analysis tool that filters out insignificant price fluctuations to highlight major trends and reversals. Instead of displaying every price movement, it connects only the most important peaks and troughs (local maxima and minima).
This helps the trader to see the overall picture in the market better, without getting distracted by 'market noise' — minor, insignificant price changes that often confuse.
Zigzag is built on the principle of connecting key points on the chart. Its main task is to show where the price has changed significantly.
Main Zigzag settings:
1. Percentage change (Deviation): Indicates how much the price must change (in percentage) for the indicator to 'notice' the movement and draw a line. For example, if the parameter is set to 5%, Zigzag will ignore changes smaller than this value.
2. Depth: Shows how many candles the indicator must analyze to find a maximum or minimum.
3. Backstep: The minimum distance between adjacent Zigzag points to exclude false signals.
The Zigzag indicator can be useful for different tasks, but it is most often used for the following purposes:
Trend searching
1. Zigzag helps to highlight the main trend in the market. If the Zigzag line goes up (connecting lows and highs in a rising market), it means the trend is upward. If the line goes down, the trend is downward.
2. Identifying support and resistance levels
Zigzag connects key points that traders can use as support and resistance levels. For example, if the indicator shows a local maximum, it may be a resistance area, while a local minimum may be a support level.
3. Construction of technical analysis figures
Based on Zigzag lines, popular technical analysis figures can be constructed, such as:
- Triangles;
- Head and shoulders;
- Double tops and bottoms.
Example of application
Imagine you are analyzing a chart and want to understand where there were significant price reversals in the market. You set the Zigzag indicator with a parameter of 5% — this means that the indicator will only show movements where the price changed by 5% or more.
Now you see:
- Where the main trends started and ended;
- What points can be used to build support/resistance levels;
- The overall market structure that was hidden behind minor fluctuations.
Pros and cons of Zigzag
Pros:
- Ease of use.
- Helps to highlight key levels and trends.
- Removes 'noise' from the chart, making it more understandable.
Cons:
- Does not provide signals for entering or exiting trades.
- Repaints, which can be misleading, especially on short timeframes.
- Requires additional tools for making trading decisions.
The Zigzag indicator is a great tool for those who want to simplify market analysis and see only important price movements. It can be used as a supplement to other indicators to find trends, levels, and key figures on the chart.
The main thing to remember is that Zigzag does not predict the market and does not provide precise signals for trades. But in skilled hands, it can become a powerful assistant, especially when combined with other analysis methods.