The zig-zag indicator

The zig-zag indicator is used in assisting traders to identify price trends. It functions by eliminating random price fluctuations and also attempts to indicate changes in trend. The indicator only appears whenever there is a movement in prices between swing high and swing low that is greater than a definite percentage.

The indicator’s parameters are vital in covering adequate price data in such a way that it can display zig-zag waves on your chart when trading CFD. The input provided by the zig-zag parameters includes the depth, which refer to how far back the chart bar series will look. In this way, you can get the highs and lows defines to ensure that you get enough depth.

The parameters also provide the deviation, which is the percentage in price change that is required to alter the trend line from positive to negative. It is vital to play around with the parameters until you get the ones which suit your trading style.

In case the parameters are set to tight, you will have a zigzagging effect. The indicator makes use of sectional lines to connect significant tops and bottoms of the price. The minimum price change parameter determines the percentage for the price to move to come up with a new zig or zag.

The indicator also does away with price changes which are less than the given value of its parameter. As a result, it only indicates significant changes only. Most of the time, the zig zag indicator is used only when indicating the most vital turns and changes.

The primary purpose

The primary purpose of the zig-zag indicator is to ride a trend. It filters out the insignificant price movements that take place within a sustained, long-term trend. In many ways, it is designed to assist traders to maintain a profitable market position all through a sustained trend.

The indicator also works by drawing its own trendlines which are created or adjusted only when a price movement above a designated percentage takes place. On many diverse versions of the indicator, the default value is usually 5%. This means that it will not register any fluctuation in price that is below 5%.

Because it does not react to all the minor, insignificant price moves which take place in a day to day trading, the zig-zag indicator assists traders to avoid being fooled by temporary price moves into abandoning profitable positions. Additionally, traders are also in a position of staying focused on the overall trend which is in place.

Limitations of the zig zag indicator

The zig-zag indicator is largely a very lagging indicator. This is because its values are plotted only after the close of each period. Additionally, since it is only able to draw a permanent new line after the price of a security has moved considerably, it does not help a trader very much.

Every time there is a change in the direction of price, the zig-zag will start drawing a new line in that direction. However, in case there is an ultimate failure in the movement of price, the zig zag designated threshold will move back in the opposite direction.

Such a direction will result in the temporary line disappearing even as the zig-zag starts to draw a new line based on the most recent significant price movement.

Using the zig zag with other indicators

The zig zag has very little use for traders or analysts who may intend to use it to predict the future of price movement. However, the swing highs and lows that the indicator identifies can go a long way in representing the future support or control levels.

This can go a long way in assisting traders to spot key price levels which may be control points for future trading. It is worth of note that the zig-zag indicator sometimes reveals major trend changes by virtue of the lines it draws.