Technical Analysis: The Zig Zag Indicator
The Zig Zag indicator is what is known as a filtering or smoothing indicator. Its primary purpose is to filter out insignificant fluctuations in the price of a security and accurately track whatever the existing trend is. It can also be used to identify support and resistance price levels in a market.
It’s also sometimes used by technical analysts who adopt the Elliott Wave Principle of analysis to help identify the beginning and end of each wave in a cycle.
The Zig Zag Indicator’s Primary Purpose – Riding a Trend
By filtering out “noise” – insignificant price movements that occur within a sustained, long-term trend – the Zig Zag indicator is designed to help traders maintain a profitable market position throughout a sustained trend.
The Zig Zag indicator draws its own trendlines that are created or adjusted only when there is a price movement greater than a designated percentage amount. The default value on most versions of the indicator is 5%, meaning that the Zig Zag indicator will not register any fluctuation in price that is less than 5%. Traders and market analysts can, of course, set their own minimum percentage values for the indicator. Values between 6% and 10% are commonly used variations from the default 5% value.
By not reacting to all the minor, insignificant price moves that occur in day to day trading of a security, the Zig Zag indicator ideally helps traders to avoid being fooled by temporary price moves into abandoning profitable positions and to stay focused on the overall trend that is in place.
The Zig Zag indicator is what is known as a filtering or smoothing indicator. Its primary purpose is to filter out insignificant fluctuations in the price of a security and accurately track whatever the existing trend is. It can also be used to identify support and resistance price levels in a market.
It’s also sometimes used by technical analysts who adopt the Elliott Wave Principle of analysis to help identify the beginning and end of each wave in a cycle.
The Zig Zag Indicator’s Primary Purpose – Riding a Trend
By filtering out “noise” – insignificant price movements that occur within a sustained, long-term trend – the Zig Zag indicator is designed to help traders maintain a profitable market position throughout a sustained trend.
The Zig Zag indicator draws its own trendlines that are created or adjusted only when there is a price movement greater than a designated percentage amount. The default value on most versions of the indicator is 5%, meaning that the Zig Zag indicator will not register any fluctuation in price that is less than 5%. Traders and market analysts can, of course, set their own minimum percentage values for the indicator. Values between 6% and 10% are commonly used variations from the default 5% value.
By not reacting to all the minor, insignificant price moves that occur in day to day trading of a security, the Zig Zag indicator ideally helps traders to avoid being fooled by temporary price moves into abandoning profitable positions and to stay focused on the overall trend that is in place.