Technical Analysis, Studies, Indicators:
Zig Zag
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Description: Zig Zag technical indicator for using in
the analysis of Eliot Waves, technical analysis,
Fibonacci numbers 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.
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%
V. K.
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