Technical Analysis, Studies, Indicators:
Zig Zag
Description
The Zig Zag indicator is a trend following indicator that is used in technical analysis to predict when an analyzed security's momentum will reverse.
The Zig Zag appears on a chart as a series of trend lines that connect significant peaks (resistance points) and bottoms (support points). This indicator is developed to filter out price fluctuations (smaller trends) and show only significant trends and trend changes. Zig Zag has a minimum price change parameter, which determines the percentage or number of points that the price must move in order to draw a new trend line. In this way, this indicator eliminates those trends that are smaller than the value of the minimum price change selected. For example, if a user sets the Zig Zag's minimum price change at 3%, then price moves that are less than 3% will not generate a trend on the chart. Hence a trader will see only 3% and larger price changes and will be able to ignore the countless moves that do not affect the general price trend.
Technical Analysis
The Zig Zag indicator is considered very useful in technical analysis. It is used to determine price trends, resistance and support areas, classic chart patterns like head and shoulders, double tops and double bottoms. At the same time, this indicator is widely used to reveal Elliot Waves and various trends' figures with the goal of determining a security's position in the overall wave cycle.
Since Zig Zag is a lagging indicator, which draws a trend line only after a change in trend direction has occurred, it is difficult to use it to predict a trend reversal. Still, the predictive power comes from using Zig Zag in the analysis of Elliott Waves, Fibonacci retracements and projections.
Chart 1: S&P 500 3-month chart - Zig Zag Indicator.
Minimum price change = 3%
Chart 2: S&P 500 3-month chart - Zig Zag Indicator with Retracement
Minimum price change = 3%
Chart3: S&P 500 5-day chart - Zig Zag Indicator with Fibonacci Levels on the last trend.
Minimum price change = 1%
Formula and Calculations
Zig Zag is a set of trend lines where a trend line is drawn when price movement is bigger than selected $ or % value.
By V. K. for MarketVolume.com
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