The zig zag indicator is a basic tool that analysts use to find out when a security's trend is reversing. By determining the support and resistance areas, it helps to identify significant changes in price while filtering out short-term fluctuations, thus eliminating the noise of everyday market conditions. It is an excellent tool for any trader who follows indicators that use swing highs and swing lows.
To use the zig zag indicator, a percentage of price movements must be set. Although the default value for a zig zag is 5%, a setting of 9% would ensure that only price fluctuations of 9% or more would be shown in the chart. This eliminates smaller price swings and allows the analyst to see the bigger picture. Normally, closing prices of securities 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 and the required information appears.
The zig zag indicator is an effective tool for analyzing historical data. It is only based on hindsight and is not predictive in any way. It is based on the past prices of securities and cannot forecast the next swing highs and swing lows.
Even though the zig zag indicator is not predictive, it is still very useful. It is often used in conjunction with applications such as Elliott wave counts. Analysts can also use the historical highs and lows to draw lines to identify Fibonacci projections and retracements. Chart patterns such as double bottoms, double tops, and head and shoulders can also be determined.