How to Trade with the ZigZag Indicator

The ZigZag indicator is primarily a tool used for canceling market noise and helping to visualize the actual progress a financial instrument has made from point A to point B. The ZigZag indicator software helps traders to visualize the highs and lows of price swings over the course of numerous timeframes.
ZigZag indicator is a lagging type, which means that the indicator is not predicting reversals or continuations. It simply helps traders visualize information better. This indicator, like many others, is a background tool and is not as interactive as Pivot Points and others.
The ZigZag indicator is mostly used during high volatility periods. The indicator can be coupled with various other indicators and strategies. The ability to tighten the timeframes and look at relevant swing highs and swing lows of a particular trading session could be a perfect opportunity for most traders to find entry points.
In this ZigZag trading indicator guide, we will talk about ways to calculate your tool preferences, how this indicator works, and what are the most common market conditions under which the tool is affective.

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How does the ZigZag indicator work?

The most basic explanation for the ZigZag indicator is that it cancels the market noise and helps us see a much clearer and easy to understand picture of the state that the market is in currently. In order to learn how to trade ZigZag indicator, the trader needs to set a specific point at which the indicator needs to start, and a point at which it needs to stop (if it’s a calculation of past sessions). If it’s a calculation for the current session, then the endpoint does not need to be set. But how to trade with ZigZag indicator? Is the information you receive enough? Well, it’s enough to use other indicators and get a much easier way of implementing them in your trading strategy. ZigZag works well with various indicators. 
For example, let’s say that the EUR/JPY was at 102.00 a month ago, and we want to see the trend changes that it went through until today’s 111.00 exchange rate. Naturally, across this 1-month period, the exchange rate changed quite a lot, even going down to 98.00 price point and going up to 121.00 and all the small volatility movements between them. What the ZigZag indicator will help us see is the highest and lowest points of each trading session during the last month.
ZigZag indicator MT4
The Forex ZigZag indicator, in this case, would show us exactly 4 distinct lines on the chart, because there were 4 sessions of4 weeks. On these lines, we will see the lowest and highest points it managed to reach within a single week. Therefore, instead of 100s of lines going up and down, we get to look at only 4 going either up or down. This helps recognize the potential for a currency pair and the limitation of how much it can reach purely based on market sentiment.
Here’s how you can calculate with the ZigZag indicator:
  1. Choose your preferred swing high or swing low
  2. Determine the percentage of price movements
  3. Find new highs and lows that are different from starting one
  4. Draw a trendline
  5. Repeat until reaching the current trading session

Mistakes to avoid when using ZigZag indicator MT4

No matter how easy it may seem to use this indicator, there are still some mistakes that even more seasoned traders make from time to time. Therefore, it’s very important that beginners know about this and try to avoid them as much as possible.

Mistake 1: only using the ZigZag indicator without any other tools

Yes, the ZigZag indicator is a very useful tool on its own. It can help determine where trends start and where they end, but it is not all-powerful to a point where it can give you the exact information you need to place a successful trade. As already mentioned in the beginning, even the best ZigZag indicator is just a background tool that helps understand the market better for using other tools rather than directly giving instructions on where to place the trade.

Mistake 2: Doing too much manual calculation

Although manual calculation could be a lot more customizable as you don’t have to rely on market session openings or closings, it could lead to quite a lot of issues. You see, a human calculation may be much more personalized, but it has a high chance of being inaccurate. A specifically designed ZigZag indicator algorithm to do the calculation for you in seconds is usually a better idea than trying to solve it for hours.

Mistake 3: using without knowing Elliot wave theory

The ZigZag indicator MT5 may look extremely similar to the Elliot wave theory for those who already know about it. This theory coincides with the core concept of what the ZigZag indicator gives us. A clean and easy-to-understand market without volatility getting in the way. The more you know about this theory, the more likely are you to better understand how the ZigZag indicator works and use it properly.
How ZigZag indicator works

What's the ZigZag indicator secret?

The ZigZag indicator is simple to use and simple to understand. Simplicity is essential in trading. To make money trading financial instruments, it's important to buy low and sell high. When it comes to trading CFDs, you can simply sell when prices get to the high point. ZigZag makes these highs and lows highly visible. When using ZigZag trading strategy coupled with other indicators, it's essential to use it in trending markets as signals are more visible. ZigZag can be coupled with moving averages and RSI indicators to increase trade success rates.

Forex trading strategies using the ZigZag indicator

ZigZag is very popular, as it is very visually pleasing and easy to use. It makes detecting trends and overall price swings much easier. The main idea is to test each strategy before implementing them into live trading. Using a demo account can accelerate the development of viable ZigZag trading strategies. ZigZag is a repainting indicator and traders must exercise extra caution when using it in trading. There are several trading strategy methods where ZigZag has the potential to amplify profits:

Trend confirmation

ZigZag indicator can be used in trend-following strategies to confirm the main direction of the trend. After retracement, use ZigZag to enter a trend continuation trade when it confirms the trend. Going long when the ZigZag turns upward after a downtrend could be a good idea. Ensure to await the retracement first and only enter when the price shows signs of trend continuation together with ZigZag. Many trend continuation patterns can ease the process of detecting retracements. 

Swing Trading

Identifying the price swing points is easier with ZigZag as the indicator directly shows the points where the price changes directions. Enter a trade when the price retraces to a significant level, and the ZigZag confirms a reversal. The profit target in this case could be the next ZigZag swing point. 

Fibonacci retracement with ZigZag

As you would have already guessed, ZigZag makes using the Fibonacci retracement tool much easier. It directly shows the maximum and minimum price swings where you need to place the tool. Entering trades at the confluence of Fibonacci levels and ZigZag reversal points can be much more profitable than using Fibonacci alone. 

Channel breakouts

Drawing trend lines or channels using ZigZag swings is easy, and even beginners should do it without breaking a sweat. Trade breakouts when the price breaches the channel created by connecting the two closest ZigZag upper swings and lower swings. ZigZag can be used in this situation to filter false breakouts also known as fakeouts. 

Divergence trading

Divergence means when the price makes new higher highs while the indicator makes lower lows. Using the divergence between the ZigZag indicator and price movements can be a great way to utilize the full power of this indicator. If the ZigZag creates a new high, but the price does not, it might indicate a potential reversal. 

Support and Resistance

Identifying the support and resistance levels is easier using the ZigZag indicator. Traders often use these levels to trade bounces in ranging markets. Range markets are quite a frequent phenomenon and happen more frequently than trends. Capitalizing on the ZigZag indicator to quickly draw support and resistance will make it easy for traders to profit from price bounces.

Multiple Time Frame Analysis using ZigZag

Multiple time frame analysis involves analyzing the price of the same asset in different time frames. Using ZigZag traders can enter trades where the direction of the trades aligns with the prevailing trend on higher time frames.

Volatility Breakouts

Combining ZigZag with volatility indicators can increase the success rate of trading strategies that employ volatility methods. Enter trades when the price breaks out of a range with confirmation from the ZigZag.

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ZigZag indicator tutorial – Key takeaways

The ZigZag indicator is primarily a tool for identifying trends through calculating highs and lows. It should not be used as a direct tool, implying that the price will go to where it has been before. It’s not that kind of tool. The only value that ZigZag gives us as traders is a clearer vision for future analysis.
As mentioned above, the ZigZag indicator cancels all market noise besides what’s most important for the trader. All the candlesticks will be “straightened” out for you to see the momentum of the movement. The steeper the rise or fall, the larger the momentum was. This “simplification” of the chart helps with using other tools as well.
The one thing this ZigZag indicator tutorial should show you is that using this tool is very hard and sometimes requires complex mathematical calculations to work as it’s supposed to. Therefore, using the automated calculator within the indicator itself is usually the most recommended option.

FAQ on ZigZag indicator

How do I download the ZigZag indicator?

This depends on which software you are using. For the ZigZag indicator MT4 download, it’s best to go to the MetaQuotes marketplace and download one for free. With cTrader, all you have to do is go to the cTrader website and find the software on the marketplace as well.
Most of the trading software comes with a pre-installed tool. For instance, you're immediately getting a stock MT4 ZigZag indicator upon downloading the software, so you may not have to specifically install one at all.

What is the ZigZag indicator formula?

The ZigZag formula or algorithm is:
If %change>=X,plot ZigZag
HL stands for High and Low prices during trading sessions
%change is the minimum price movement you would like to track
In terms of retrace and LastExtreme, they’re used for tracking all the retracements and the repetition of those retracements when using the Forex ZigZag indicator.

What’s the difference between ZigZag and Donchian channels?

The ZigZag indicator showcases the trends that the asset has gone through, therefore its lowest and highest price points. Although the Donchian channel does the same thing, it adds a little more to the visual aspect, helping the traders understand the actual growth of the financial asset they are tracking.

How to use ZigZag indicator in Forex trading?

ZigZag indicator is a lagging indicator, which means that it's not going to give you trading signals. It makes reading price charts easier. ZigZag helps to determine price swings highs and lows. It's best to use the indicator in combination with other indicators and simple trendlines. ZigZag is a good indicator for analyzing past performance, however, market conditions often change and past performance may not help traders plan future trades. ZigZag is usually used in trending markets by trend traders. 

What is ZigZag indicator?

ZigZag indicator is a lagging indicator displaying highs and lows in a way that it becomes easier for traders to visualize price movements on charts. ZigZag indicator is typically coupled with other indicators. The indicator is generally used in trends to determine trend direction. Higher highs and higher lows on ZigZag indicator means that the price is moving upwards. Lower highs and lower lows means that the trend direction is downwards. The indicator helps traders to determine trend direction. 
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