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 right now.
However, in order to do this, 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.
For example, let’s say that the EUR/JPY was at 102.00 1 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, sometimes going down to 98.00 and sometimes 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.
So, 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:
- Choose your preferred swing high or swing low
- Determine the percentage of price movements
- Find new highs and lows that are different from starting one
- Draw a trendline
- 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 veteran 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. Not saying that you can’t make a correct calculation, it’s just that relying on a specifically designed 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.