How to Trade with the ZigZag Indicator

The ZigZag indicator is primarily a tool used for canceling market noise and trying to visualize the actual progress a financial instrument has made from point A to point B. The ZigZag indicator software tries to visualize the highs and lows of each trading session over the course of numerous timeframes that can be chosen by the traders themselves.
This indicator like many others is a background tool and is not as interactive as Pivot Points and others. It’s mostly referred to as a background tool, which simply gives you information rather than calculates it for you and provides an immediate market entry point.
The ZigZag indicator is mostly used during high volatility periods, which means all the time for Forex pairs. 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 environments we can see it. Naturally, we will touch on ways to download and install it as well.

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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 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.
ZigZag indicator MT4
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:
  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 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 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.
How ZigZag indicator works

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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 of 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 to track all of the retracements and the repetition of those retracements when using the Forex ZigZag indicator.

What’s the difference between ZigZag and Donchian channels?

The Zig Zag 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 bit more to the visual aspect, helping the traders understand the actual growth of the financial asset they are tracking.
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