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Forex ZigZag Strategy
Written by: PaxForex analytics dept - Tuesday, 14 June 2016 0 comments
How the forex market was developing through past, people were creating lot of forex trading strategies by using different trading indicators such as ZigZag, Bollinger Bands, Eliot Waves Commodity Chanel Index etc. ZigZag trading strategy is a very popular strategy used by many traders, which foundation relays on the ZigZag Indicator. ZigZag indicator is one of the many trend indicators which can be used in trending market conditions.
The ZigZag indicator is nothing but trend lines that connects highs and low in the prices and thus provides a visual confirmation of the interim highs and peaks in the market. It is a dynamic indicator and therefore the final high or low can be changed if a new high or a low is plotted in the market. As a matter of fact, the Zigzag indicator is a tool rather than an indicator as it is used to filter out the small price movements in the market. It merely tracks and connects the extreme points in the markets.
The ZigZag feature is not an indicator per se, but rather a means to filter out smaller price movements. A ZigZag set at 10% would ignore all price movements less than 10%. Only price movements greater than 10% would be shown. Filtering out smaller movements gives traders the ability to see the forest instead of just trees. It is important to remember that the ZigZag feature has no predictive power because it draws lines base on hindsight. Any predictive power will come from applications such as Elliott Wave, price pattern analysis or indicators.
The ZigZag indicator has a very clear objective: to let you have a clearer perspective about price action and the meaningful quality of retracements and trending movements. This indicator is built upon the simple principle of pseudo fractal formations and the notion that only movements between them higher than a certain percentage value of the instrument’s value are worth considering. The ZigZag is drawn by locating a pseudo fractal formation of either a high or a low where the two bars around the high and low are both lower and higher respectively.
Trading Forex With the ZigZag
This tool is designed to be complementary and should not be the focal point of a forex trading strategy. It is most commonly used in conjunction with Fibonacci or Elliot Wave trading systems. Swing traders love the ZigZag because it helps them analyze entries on retracements. The ZigZag indicator is there to apply consistency to trading signals. This should translate into a more consistent application of other trade strategies. Whatever trading strategy you use, keep in mind that the ZigZag is a lagging indicator. It does not predict anything on its own. The forex market is very fast paced, so try to complement it with a system that offers leading signals.
On first glance the ZigZag indicator appears to be the holy grail of trading, but you have to remember that it is a lagging indicator and the values are plotted after the price closes. So, you will want to
use the indicator to monitor the health of the primary trend, and not a tool for actively trading the market. The forex market is very fast paced, so try to complement this indicator with a strategy that offers a leading signal.
The ZigZag is a potentially useful indicator since it makes retracement and trend continuation formations clearer than with a simple glimpse at the chart since it automatically eliminates movements which are below the cut off threshold within the indicator. There are several ways in which the ZigZag indicator can be used but most of them include the entering of trends upon retracements or the use of support and resistance levels (assumed as ZigZag repeated inflection values) to trade. However, since the definition of the levels takes time you need to learn how to lead the indicator through a deep understanding of its meaning.
One thing which must be very clear is that the ZigZag is not showing you anything which is not already on your screen and prone to interpretation with a simple glimpse and line drawing. The ZigZag is merely a tool to help you have clearer mathematical definitions – when building algorithmic strategies – or a clearer sight when trading manually but it is by no means a foreteller of future price values. In order to succeed with the ZigZag as with any other indicator you need to understand how the indicator is built and what it is telling you.
You need to act based on the consequences of current ZigZag formations instead of attempting to enter based just on the notion that the ZigZag will yield some sort of magical prediction power (which it doesn’t have). Many people love the ZigZag because it allows them to see something they didn’t see before but it is very important to understand that the information shown has always been there on the charts and that the ZigZag merely represents the same information in a filtered fashion.
The successful use of the ZigZag requires judicious interpretation and knowledge of what the different movements are telling you about where price is headed. As with any trading strategy, the secret to success lies in its own individual settings, and any combination of indicators and templates. Therefore, you should experiment with the settings until you have found the right one for your trading.
The ZigZag filter price action and do not have any predictive power. The ZigZag lines simply react when prices move a certain percentage. Traders can apply an array of technical analysis tools to the ZigZag. Traders can perform basic trend analysis by comparing reaction highs and lows. Traders can also overlay the ZigZag feature to look for price patterns that might not be as visible on a normal bar or line chart. The ZigZag has a way of highlighting the important movements and ignoring the noise. When using the ZigZag feature, don't forget to measure the last line to determine if it is temporary or permanent. The last ZigZag line is temporary if the current price change is less than the ZigZag parameter. The last line is permanent when the price change is greater than or equal to the ZigZag parameter.