Online Trading Concepts

Zig Zag

Zig Zag

  1. Zig Zag Defined
  2. 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:

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%:

Volume accumulation confirming downtrend

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

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