The crypto industry has long seen so much growth in terms of trading as this industry has presented many traders and investors with opportunities to become financially free while aiming to remain consistent in what they do.
To fully capitalize on the life-changing trading opportunities presented by cryptocurrency markets, traders must rigorously learn and understand technical analysis and the various applications of multiple trading tools and indicators.
Many traders battle with choosing the right technical tools and indicators that best fit the market conditions and strategies to be employed as the crypto has been observed to mauve in trends over the years.
Although it can be rewarding, having a thorough understanding of various technical indicators and analytical techniques can also assist traders in focusing on the trade strategies and fewer indicators most compatible with their personalities.
In this article, we'll learn everything there is to know about the zig zag indicator, including how it functions, what it tells traders, and the benefits and drawbacks of using it when trading on the cryptocurrency markets.
What Is The Zig Zag Indicator And How Does It Work?
Technical analysis traders use the Zig Zag Indicator to spot price trends and eliminate random price fluctuations, resulting from price changes or trend changes. Zig Zag indicator lines result from price movement from one swing high point to another swing low.
The ability of the Zig Zag indicator to filter price movement of even 5% enables technical analysis traders to spot price trends within a specified timeframe.
Technical analysis traders usually use the Zig Zag indicator with the Elliot Wave Theory to find the positioning of each wave in the total market trend, with traders adjusting the percentage settings to get the best possible result as traders could adjust the percentage settings to something that suits their strategies and the crypto asset being traded.
The Zig Zag indicator is not built to predict future price trends but is usually used by traders to identify potential support and resistance areas with the help of the plotted swing highs and swing lows. The Zig Zag indicator line is also used to spot trend reversals or reveal potential trend reversal patterns.
Traders who are used to trading with the help of the Zig Zag indicator sometimes use it to find double bottoms and head and shoulders patterns with the help of other trading indicators such as Relative Strength index (RSI) and stochastic oscillator for confluence and to confirm if a crypto asset is overbought or oversold as the Zig Zag indicator moves.
Example of zig zag indicator
The image above shows the Zig Zag indicator trailing the price of BTCUSD, forming swing highs and swing lows. Technical analysts use the Zig Zag indicator with RSI to find great trading opportunities with high setup and probability.
What Does A Zig Zag Indicator Tell Traders?
The Zig Zag indicator is used by many traders during technical analysis to spot or monitor potential price reversals or trend reversals of an asset. When this technical tool is used with the basics of trading, such as support and resistance, it helps to find trend reversal and position a trader to make a profitable run.
It does assist in removing many of the distracting elements that are typically present in a trend and concentrates only on the general direction of that move.
The indicator does this by calculating price movement based on a specific percentage. There are several theories, and it will depend on the trader in question which one to employ. However, the fundamental tenet is that a trend is not considered to have changed at all if it does not change by X percentage. It is important to know that 5% is the default setting.
Zig Zag Indicator Formula - How To Calculate
Calculating the Zig Zag formula manually could be a bit complex and time consuming considering that traders are looking for the best strategies to implement within the shortes time limit. Below is the Zig Zag formula;
If %change>=X,plot ZigZag
HL=High-Low price series or Closing price series
%change=Minimum price movement, in percentage
Retrace=Is change a retracement of the previous
move or an absolute change from peak to trough?
LastExtreme=If the extreme price is the same over
multiple periods, is the extreme price the first or
Trading the Zig Zag indicator requires you to implement the tool directly on Margex exchange, taking away all the stress needed to make all manual calculations before application.
Pros And Cons Of Zig Zag Indicator
Despite being adopted by many traders, Zig Zag indicator still needs to catch up in some aspects, highlighting this indicator, like other indicators, is not 100% advantageous. Let's examine the pros and cons of Zig Zag indicator.
- Filters price fluctuations in the market help traders to accurately track trends formed
- It can be used to identify significant support and resistance levels on the chart with little effort required
- Buy and sell signals, like other trend-following indicators, are based on past price history, which might not be indicative of future price action
- Extreme price and market volatility could affect the Zig Zag lines, thereby producing false signals
Zig Zag Indicator And Other Harmonic Patterns
From the image above, the XABCD harmonic pattern can be used with the Zig Zag indicator to find better entries and spot potential price trends. The harmonic patterns have been identified to be quite successful in trading; combining this tool will create better confluence for a trader.
How To Read Zig Zag Indicator On Charts
On charts, the Zig Zag creates trendlines that join swing highs and lows. However, it only generates lines when the highs or lows indicate a sizable change in price. Most significantly, it is determined by the threshold for percentage moves for the Zig Zag.
How To Use The Zig Zag Indicator In Trading? (Step-By-Step Guide With Screenshots From Margex)
Margex is a Bitcoin-based derivatives exchange that supports leverage trading and staking of tradeable assets simultaneously with the help of its unique staking feature built on the Margex platform.
Traders and investors can open a leveraged trade of up to 100X while staking the same tokens to earn up to 13% APY return on investment. There are no lockup periods, and all staking rewards are sent daily to the staking balance.
Margex protects its users and traders from pumps and dumps prevalent in the crypto market with the help of its MP shield protector.
Margex makes it possible for traders to access all its tools to trade freely, including the use of the Zig Zag indicator. Let us see how to apply this indicator to our trades.
Step 1: Create A Free Margex Account
Create a free Margex account if you do not own one and deposit some funds into your account to enable you to put into practice all the technical analysis skills you are learning.
Step 2: Add Zig Zag Indicator To Your Trade
Click on the trade button to access all the tools present for technical analysis, click the indicator button, and search for the indicator to be used; in this case, we would search for Zig Zag Indicator, as seen from the image above.
Best Trading Strategies With Zig Zag Indicator
Different strategies are employed to trade with the Zig Zag indicator; let’s explore a few.
Zig Zag With Fibonacci Retracement
The Zig Zag indicator can be used with the Fibonacci levels as most traders usually have a concept of respecting the Fibonacci levels more as having more authority when it comes to trading.
The two indicators can work hand-in-hand to have a better confluence and increase the probability rate of a better entry and profit return.
Zig Zag And Uptrend Channel Pattern
The price of BTCUSD formed an uptrend with the Zig Zag indicator confirming swing highs and swing lows. A break of this channel to the downside led to the price of BTC dropping from a region of $21,000 to a region of $16,000.
A trader with a good understanding of combining such tools will open a short position for the asset as this was a high probability setup as the price was rejected to the downside.
Frequently Asked Questions (FAQ) About Zig Zag Indicator
What Does The Zig Zag Indicator Mean?
The indicator is employed to detect price trends. It attempts to highlight trend changes while removing arbitrary price fluctuations.
Zig zag lines appear when a price movement between a swing high and a swing low is greater than a predetermined percentage.
How Do You Read A Zig Zag Indicator?
To read the Zig Zag indicator is very easy as it shows price direction as it moves from lower left to higher upper right.
This enables a trader to know the overall market trend, creating a filter for price direction.
What Is The Zig Zag Strategy?
Zig Zag strategy uses its swing highs and swing lows to determine market trends.
The Zig Zag strategy can be combined with other strategies like chart patterns, channels, trendlines, harmonic patterns, and Fibonacci retracement values to gain better confluence.
Is Zig Zag Indicator Good?
Yes, the Zig Zag indicator is a good technical tool but is not 100% accurate, so trading this tool with other indicators is ideal
Is Zig Zag A Lagging Indicator?
Yes, the Zig Zag indicator compares past prices, making it very good price movement and insignificant fluctuations in prices, as this could affect the overall decision of a trader.