The Zig-Zag Indicator is in some ways part moving average, and part oscillator. The reason for this is that it simply tries to smooth out noise in the marketplace and allow a trader to see clear trends. It can also be used to help identify certain patterns as well, such as the head and shoulders technical pattern.

The indicator is simply a series of lines that are drawn on top of price, in an attempt to show the overall direction of price. It looks similar to a series of trend lines, and can help keep a trader on the right side of the market. As it smoothes out the rising and falling of prices, it works in the same way a moving average does – pointing the correct direction of the market over time.

One thing that makes this indicator different is that is measures percentage changes in this overall price of a currency pair. Quite often, a trader will set the lines to change direction after 3-5% price moves. In other words, a trend will still be intact until the price goes against it by whatever setting the trader chooses. This helps the trader differentiate between a simple pullback, and a dramatic trend change. By knowing the overall direction and the difference between pullbacks and trend changes, the trader can trade accordingly.

The Zig-Zag indicator is also very good at making patterns more visible as the lines are much more straightforward than candles can be at times. An errant bump in price won’t change the overall lines on the indicator, so it is much clearer in that way. Used with other indicators such as oscillators, you will be able to spot changes in trends in a very clear and concise way. It will also help you understand when a pullback is about to turn back in the trend’s favor by combining this indicator with others as well, such as the Stochastic Oscillator.

Published on 17th of June 2011
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