Various Applications of the ZigZag Indicator



The ZigZag indicator is a very diverse indicator that allows for a huge versatility in both trading and analysis. We use the MetaTrader 4 ZigZag indicator for:

  1. Spotting tops and bottoms;
  2. Entry points;
  3. Fibonacci tools;
  4. Harmonic patterns;
  5. Channels and patterns;
  6. Multiple ZigZag charting;
  7. Wolfe Waves;
  8. MT4SE Keltner Channels.

The ZigZag indicator utilises sectional lines to connect significant tops and bottoms of the price.

The minimum price change parameter determines the percentage for the price to move to create a new zig or zag. This indicator eliminates price changes that are less than the given value of this parameter. Hence, the ZigZag indicator highlights significant changes only.

In most cases, we use the ZigZag indicator to indicate only the most important turns and changes; applying other indicators, i.e., Elliot Waves, can provide a more holistic view.

ZigZag Indicator MT4 Settings

The ZigZag indicator tracks and connects extreme points of the chart, the distance between these points being equal to or higher than the percentage specified for the price scale.

To use the ZigZag indicator, a percentage of price movements must be set. Although the default value for a ZigZag deviation is 5, a setting of 10 would ensure that only price fluctuations of 10% or more would be shown in the chart. This eliminates smaller price swings and allows the analyst to see the bigger picture.

Normally, the closing prices of Forex pairs are used, and imaginary points are placed on the given chart where the price reverses by the set percentages. These points are then connected by straight lines, red by default, and the ZigZag appears.

ZigZag Indicator Properties, MT4 Platform

Source: ZigZag Indicator Properties, MT4 Platform

The default settings are shown in the screenshot above... and here is how we should read them.

Depth is the first setting of the ZigZag indicator. This is the minimum number of bars with no second maximum or minimum deviation from the bar.

Deviation is the number of pips or points (depending on the market) after the previous minimum or maximum is formed.

Backstep is the last setting and reflects the minimum amount of bars between which the high and low can be plotted.

These settings should be adapted to various markets, and you will probably end up using different settings for one market or instrument versus another. Additionally, you could also end up changing the settings for the same market or indicator when the market conditions change along with its volatility.

Spotting Tops and Bottoms

The ZigZag indicator can identify tops and bottoms depending on the input settings. Traders should be able to identify higher highs, higher lows, lower highs, and lower lows just by looking at the indicator lines as shown in the example below. This allows for an easier assessment of a trend.

EUR/USD H4, Admiral Markets Platform, Jul-Sep 2017

Source: EUR/USD H4, Admiral Markets Platform, Jul-Sep 2017

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Price Entries

Once a temporary low or high is identified, a trader might opt to enter a trade based on the the trend patterns, such as the 1-2-3 pattern. The 1-2-3 pattern is the bottom, a correction, a retest, and a rebound. The pattern usually occurs at the end of trends and swings, i.e., an indication of a change in trend. They can also be found within a trading range, taking place when the directional momentum of a trend is diminishing. By using the ZigZag indicator, you should be able to identify it easily.


EUR/USD H4, Admiral Markets Platform, Jun-Sep 2017

Source: EUR/USD H4, Admiral Markets Platform, Jun-Sep 2017

Harmonic Patterns

In the two examples below, we can see how the ZigZag indicator helps traders find ratios for using harmonic patterns. However, a common issue with using the ZigZag indicator to chart harmonic patterns is that the the last leg of the harmonic pattern might re-paint.

AB=CD Pattern

The AB=CD pattern is a four-point price structure, in which the initial price segment is partially retraced and followed by an equidistant move from the completion of the pullback.

In Classic AB=CD, the BC is a retracement of 61.8%–78.6% of AB, with CD being the extension leg of 127.2% to 161.8% (equal in price distance). In AB=CD extension, CD leg is an extension of AB between 127.2%–161.8%. The ABCD and the BAT pattern use the ZigZag indicator to plot the pattern on the chart.

GBP/USD M5, Admiral Markets Platform, Dec 2016

Source: GBP/USD M5, Admiral Markets Platform, Dec 2016



EUR/JPY M15, Admiral Markets Platform, Dec 2016

Source: EUR/JPY M15, Admiral Markets Platform, Dec 2016

ZigZag and Fibonacci Tools

Many custom indicators use the ZigZag indicator to plot Fibonacci levels. Zigzags are usually considered corrective waves, or three-waves structures. Considering the wave structure of Fibonacci, according to EliteCurrenSea.com, the concept is that Fibonacci levels will have a higher chance of being respected depending on the most likely wave count at the time. The two go hand in hand and reinforce each other very neatly. Obviously, you can use the Fibs as well with the ZigZag waves when applying them on a candle or a natural swing and it could work perfectly fine. This is an example of how the custom-made Fibonacci indicator that uses a default MT4 ZigZag indicator showing Fibonacci levels, arcs, and time zones.

EUR/USD H1, Admiral Markets Platform, Sep 2017

Source: EUR/USD H1, Admiral Markets Platform, Sep 2017

ZigZag Channels and Patterns

The ZigZag indicator is also used within different channel indicators. Due to its nature, when you combine all of the above-mentioned, you should have most of the critical information when using the ZigZag indicator with channels. When used for channel drawing, the ZigZag indicator should be able to filter out smaller price movements, for you you to be able to ignore the noise and see the bigger picture.

EUR/USD H1, Admiral Markets Platform, Sep 2017

Source: EUR/USD H1, Admiral Markets Platform, Sep 2017

Additionally, the ZigZag indicator is able to show different chart patterns, such as the head and the shoulder; W, M, V-shaped reversals; and many others. That can really be an advantage to beginner traders who still don't know how to define patterns with the naked eye.

EUR/USD D1, Admiral Markets Platform, Dec 2015-May 2017

Source: EUR/USD D1, Admiral Markets Platform, Dec 2015-May 2017


Multiple ZigZags on the Chart

Another way to use this indicator is to have several ZigZag indicators plotted on your chart by applying multiple deviation parameters. The idea behind such a ZigZag setup is that when a smaller deviation of the indicator is inverse of the larger deviation, that could be a trigger to make your trade in the direction of the larger deviation ZigZag indicator. See the example below! The blue ZigZag line represents the main trend and the deviation is set to 36, while the red line represents smaller retracements after which the entries were made. The deviation is set on 6. This is just a theory, but its practical usage can be tested further.

EUR/USD H1, Admiral Markets Platform, Sep 2017

Source: EUR/USD H1, Admiral Markets Platform, Sep 2017

Wolfe Waves

Wolfe Waves are a naturally occurring trading pattern present in all financial markets. Originally discovered by an S&P500 trader Bill Wolfe, Wolfe Waves work a bit like Elliot Waves. Albeit there are some differences in charting techniques, this pattern is composed of five waves showing supply and demand towards an equilibrium price.

Wolfe Waves usually develop on all time frames and are used to predict where the price is heading and when it will might get there. Feel free to read more about Wolfe Waves, but be aware that the majority of the MT4 indicators use the ZigZag to plot Wolfe Waves.

EUR/USD H1, Admiral Markets Platform, Aug 2017

Source: EUR/USD H1, Admiral Markets Platform, Aug 2017

MetaTrader 4 Supreme Edition Keltner Channels

Our award-winning MT4SE is packed with unique Keltner channel indicators. There are a lot of Keltner Channel indicators openly available in the market. However, testing various Keltner Channel indicators, we noticed there were a lot of different versions of the indicator itself. As our analyst and professional trader Nenad Kerkez noted, "the Admiral Keltner Channel indicator is possibly the best version of the indicator in the open market because the bands are derived from the Average True Range". The idea behind this mini strategy is to sell when the price goes above the channel and buy when the price goes below the channel. In both cases, entries should be confirmed with a ZigZag. Feel free to experiment with different settings on both the ZigZag and Keltner indicator.


EUR/USD H1, Admiral Markets Platform, Sep 2017

Source: EUR/USD H1, Admiral Markets Platform, Sep 2017



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Conclusion

The ZigZag appears to be the Holy Grail of trading, but you have to remember that the last leg (wave) of the ZigZag might extend as it follows the price. It is called re-painting, but it is standard considering the nature of the indicator. Use the indicator to monitor the health of the primary trend, and use it with all the important tools mentioned above. It can be of a great help to traders who actively trade the Forex and other financial markets.