- Zig Zag Defined
- Interpreting the Zig Zag Indicator
The Zig-Zag indicator attempts to determine price trends, support and resistance areas, and classic chart patterns like head and shoulders, double bottoms and double tops. The Zig-Zag indicators uses both swing highs and swing lows in its calculation:
- Swing Highs: When a price (usually close) is both higher than the price previous to it and after it.
- Swing Lows: When a price is both lower than the price prior to it and lower than the price following it.
The Zig-Zag indicator can use both percentages or points in its construction. To construct the Zig-Zag indicator, there must be a certain percentage or number of points between a swing high and a swing low before a line will be drawn. The chart below of the E-mini Nasdaq 100 Futures contract visually illustrates the difference between a price retracement Zig-Zag of 3% and a price retracement Zig-Zag of 5%:
Notice how in the chart above that a Zig-Zag with a retracement percentage of 3% makes more distinct lines than the Zig-Zag with a retracement percentage of 5%. The purpose of using a Zig-Zag with a larger retracement percentage is to help eliminate price noise that is not significant for the trader's analysis.
As will be shown on the next page, the Zig-Zag can be helpful in uncovering stock cycles while screening out short-term price noise.
Next Page - Interpreting the Zig Zag Indicator
The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. OnlineTradingConcepts.com shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site. See full disclaimer.