What is a zig zag forex strategy – the ultimate guide
In technical analysis, there are many strategies and indicators, but, as a general rule, only a dozen are regularly used by individual traders. The rule is to always seek to cross-check information, using two or three indicators at a time. You should never rely on just one indicator and one trading strategy. Today, our writing offers you to discover a very useful strategy and indicator for Forex investors. We are talking about the Zig Zag Forex strategy, which should be used in addition to trend lines. In this article, we will encompass the following questions:
- What is the Zig Zag Indicator?
- How to use the Zig Zag Indicator in your trading strategy?
- How to calculate the Zig Zag Indicator?
What is the Zig Zag indicator?
For setting up your zig zag trading strategy, you need to refer to the zig zag technical indicator. The Zig Zag makes it possible to study a trend. It is a trend-following indicator. It makes it possible to determine the trend during a certain time frame. We can use the Zig Zag to analyze the price change and see if it will likely hide a future trend reversal. It removes price variations below a predefined level to study only variations with real meaning.
The Zig Zag is an indicator that allows you to identify the main trend by filtering minor variations defined by a parameter. It represents significant trend reversals and allows you to follow the evolution of a value.
The Zig Zag is calculated based on a minimum shift defined in points or percentages. A trend takes shape as soon as the progression of the courses is higher than the value of the defined minimum variation.
How to interpret the zig zag indicator?
The Zig Zag clearly indicates the trends of a value by ignoring minor price movements, less than the minimum variation. It marks the highs and lows of trends. You can use this tool in addition to the Elliott waves analysis theory, as it clearly identifies the different waves of a bullish or bearish movement.
When several peaks of the Zig-Zag curve are at the same price level, this level constitutes a significant support or resistance.
The main perks of using Zig zag indicator in your Forex trading strategy
It goes to the essentials by giving a global and simplified vision of the evolution of prices, making it possible to highlight major trends.
It can be used to determine Elliott waves or to highlight Fibonacci retracements. In technical analysis, traders also pair this indicator with candlesticks.
How to use the zig zag indicator?
Very simple! All you have to do is define a variation level and ignore price fluctuations below this level. There is no rule to know where this level should be. But we can easily consider that it is wise not to place the indicator at more than 10% or 15%. Thus, all it takes is a simple
chart pattern reading to determine if the trend is bullish or bearish. This indicator should be used with Elliott or Fibonacci to get buy or sell signals.
This indicator gives the possibility of determining the current trend but also significant reversals. It is an indicator used to make analyzes after the d-day. It cannot, therefore, be used to make forecasts. In order to be effective in its trading, one must use the Zig Zag associated with methods such as the Elliot Wave technique or Fibonacci retracements.
Many famous traders apply one form of zigzag or another in their trading method. The zigzag visualizes the Dow theory (peaks and troughs). The way the zigzag is drawn is often the same, but what differs between professional traders to newbies is how they will trade the different price levels and zones generated by the zigzag. All trading platforms contain zigzag indicators and show you their levels and key trading zones.
Limitations of zig zag indicator
In the zig zag Forex strategy, the main downside of the zig zag indicator is that, like the rest of the trend-following indicators, signals reflect the past price history. Also, beware that the last zig zag line could also be instantaneous. Therefore, the traders use this indicator to confirm the trend’s direction rather than time their entry and exit point and stop loss level.
Here are the advantages of the zigzag drawing tools:
The trading platform drawing tools allow us to indicate the levels and key trading areas:
- Levels and zones can be used for order automation.
- Drawing tools can be used on all-time units
- Drawing tools are free.
- A detailed explanation is provided as to the drawing of the zigzags.
- It is not necessary to program.
Trading zones and how to use them
The drawing tool divides each chart into four areas based on the zig zag line and the current market price.
Let’s say the market is bullish.
Zone 1 is the continuation zone of the trend. It means that the market moves toward the trend. The trendline continues to extend in case higher highs are attained. You won’t find new profit opportunities in this area. There are no trading opportunities in this area.
Zone 2 is also known as a sideways zone. There are no profit opportunities in this zone either.
Zone 3 represents the buying zone when the market is down, and the uptrend is stable. In this area, the market has fallen, but the uptrend is intact. This area presents opportunities for purchases. The type of signal you rely on is not as important as the correct identification of the buy zone.
Zone 4 indicates that the trend zone is ending. The red line in the graph usually shows the level of the current trend coming to an end. When the candlesticks close below this level, the drawing tool stops drawing. The red, however, simply doesn’t match the bottom of the latest progression. The red line is calculated with the help of the instrument’s ATR – average through the range to account for market volatility around this key level.
Each trader needs to choose the type of signal he wants to open positions in the buy zone. You should analyze several trading signals, such as for instance, hammer candles, structure points in the market or support levels, swing points, and swing highs. Once the asset’s price crosses into the buy zone, you will see the chart taking on the following appearance: in green is the buy zone, and below, indicated by crosses, is the ending of the trend zone.
Zig Zag Forex strategy
The trader should buy if he spots the buy signal. A signal results in a profitable or unprofitable trade. But you cannot fully predict this. Therefore, it’s important to react to each and every signal. It’s the only solution for the trader to ensure that he is well-positioned for profitable trades.
The trader must fight against his instincts which will tell him not to short-sell if the market is low in the buy zone. Indeed, the lower the price is in this buy zone, the more relevant the argument suggests a purchase.
Zig zag wave trading
A zig-zag “wave trading” formation consists of a movement that splits into three large waves, each made up of smaller waves. Wave A consists of five waves, Wave B of three waves, and Wave C of five waves. Zig-zags may form consecutively in the correction. This corrective move retraces up to 61.8% or 50% of the momentum.
Calculating Zig Zag Indicator
The Zig Zag indicator calculates the minimum price over the chosen period and filters out prices at a lower level than the chosen variation threshold. It then calculates the maximum price and filters those beyond the chosen variation threshold. Forex trading platforms offer tools for calculating this indicator. Otherwise, you can search for the exact formula to do it on your own.
Zig Zag Forex strategy – Final Thoughts
For setting up your zig zag trading strategy, you need to refer to the zig zag technical indicator. The Zig Zag makes it possible to study a trend. It is a trend-following indicator. The Zig Zag clearly indicates the trends of a value by ignoring minor price movements, less than the minimum variation. It marks the highs and lows of trends. This indicator gives the possibility of determining the current trend but also significant reversals. It is an indicator used to make analyzes after the d-day. The Zig-Zag is not an indicator as such. It is used to get a clear view of past trends but is of little use in predicting future trends.
Zig Zag indicator represents a fundamental tool for the identification of possible reversals on the market. However, to determine possible reversals and make trading decisions, you should equally use other indicators, including price action indicators, relative strength index, Eliott waves, and Fibonacci retracement. You should use this indicator at the start of the trades, but you should also confirm the trend using other tools. Of course, all this depends on your trading strategy.