What is the zigzag indicator?

The ZigZag indicator is a technical indicator that assesses the price of a given security in terms of the swing highs and swing lows in a given market. This will assist a trader to know the accuracy of price movements, hence filtering the market noise.

How to read and use the Zigzag indicator

The zigzag indicator is easy to read because of its ability to display zigzag line patterns on a chart depending on market movements. This indicator will only draw a line if the relative price movement is greater than the set deviation, thus removing the possibility of a ranging market. This indicator consists of three parameters, which include:

Market depth: This represents the history of the chart bar series it will need to consider as enough data.

Market deviation: This represents the percentage change that is needed to change the gin trendline from being bullish to bearish.

Backstep: This is the minimum number of candlesticks between highs and lows.

Traders can use the Zigzag indicator in combination with other indicators to determine the current trend and filter the market noise. Higher highs and higher lows mean that there’s an uptrend, while lower highs and lower lows represent a downtrend. 

FIG 1: Tradingview chart showing zigzag indicator and market trends.

Technical analysis tools like the support and resistance lines, Fibonacci retracements, trendlines, and price patterns like the double top, double bottom, or the parallel channel can also be used.

This indicator doesn’t predict the future trend but will be more reliable in a trending market. Whenever the direction of price changes, the indicator will begin drawing a new line in that new direction. This encourages one to stay in a profitable trend and not be scared of minor price fluctuations.

When the price movement of a security is not able to reach the ZigZag’s assigned threshold like 7%, 5%, etc. before moving back in the opposite direction, that temporary line earlier drawn will eventually disappear as the Zig Zag begins to draw a new line, regarding the most recent price movement.

Traders can use the Zigzag indicator in combination with other indicators to determine the current trend and filter the market noise. Higher highs and higher lows mean that there’s an uptrend, while lower highs and lower lows represent a downtrend. 

Zigzag indicator formula

The ZigZag indicator is based on the price of high-low-close (HLC), open-high-low-close (OHLC), and general candlesticks. A ZigZag set on the high-low range is more likely to change market direction than a ZigZag based on the close because the high-low range will be much larger, leading to bigger market movements.

ZigZag-(HL,% price change=x, pullback price=FALSE, Last extreme swing=TRUE)

If % price change>=X, plot ZigZag where:

HL=HighLow price/Closing price %change=Minimum price movement, in percentage

pullback price=Is change pullback of the previous price movement

LastExtreme swing = This refers to extreme price if it is the same over multiple periods (mostly identified as the first or last price ).

How to draw or plot the zigzag indicator on your Tradingview or Mt4 chart.

• Choose your specific price point and it can be a swing high or swing low area
• Calculate the percentage of price movements
• Pick out new swing highs and lows that are different from the preceding ones.
• Then draw a trendline from the starting point to the new point.
• Repeat the steps until you reach to the current market price point on your chart.

FIG 2: Shows how to draw a zigzag indicator on a tradingview chart

What are the best settings for the Zigzag indicator?

The zigzag indicator settings depend on market deviation and depth. The default settings with many brokers are 5% for market deviation, 12% for depth, and 2 for backstep. This can be adjusted depending on the trading style.

FIG 3: Tradingview chart showing zigzag indicator default settings.

When using a higher percentage of price movements (deviation), like 10%, it ensures that only price fluctuations of 10% or more are shown in the chart. This reduces market fluctuations, giving an analyst a bigger picture of what’s happening in the market.

The best zigzag indicator settings for a day trader will involve a market deviation of between 6-12% keeping the depth at 12%, considering the choppy market trends during the day.

The zigzag indicator repaints in any given chart over a period of time so it’s advisable to combine it with other indicators to maximize your profits.

How do you trade with the Zigzag indicator?

In our strategy, we will combine the zigzag indicator with the RSI indicator, giving us an opportunity to filter even more market noise. The RSI, being a momentum trend indicator, will assist us in identifying the overbought and oversold areas in the market.

Step 1: To find a buy or sell option in the market, we need to choose a trending market. The zigzag indicator will give more reliable signals than in a ranging market, as discussed above.

FIG 4: Tradingview chart showing the zigzag indicator in a trending market after consolidation.

Step 2: To confirm a long position, we need the lower high-lower low, higher high-higher low pattern, which reveals an uptrend is in place. During this period, we expect the RSI values normally to be in the 40 to 90 range, with the 40-50 range seen as support. 

FIG 5: Tradingview chart showing zigzag indicator in lower high lower low and higher high higher low pattern.

Step 3: Take a long position after the higher low has been formed, targeting a 1:2 risk-to-reward ratio, putting your stop loss just below the higher low point, and exit the market after a higher high has been formed.

FIG 5: Tradingview chart showing zigzag indicator and how to take a long position with stop loss and take profit

When taking a short trade in the market, we will also use the same indicators, but in this case, in the opposite way.

Step 1: To create a sell option or go short in the market, identify a downward trending market.

Step 2: To confirm a short position, we need the higher high-higher low, lower high-lower low pattern, which shows a downtrend is in place. The RSI reading usually stays within the 10 to 60 range, with the 50-60 zone indicating resistance.

Step 3: Take a short position, targeting a 1:2 risk-to-reward ratio, putting your stop loss just below the last lower high point, and taking your profit when a lower low is formed.

Conclusion

The main purpose of the zigzag indicator is to identify market trends and filter out unnecessary noise.

• The Zigzag indicator is mostly preferred in higher timeframes than in lower timeframes for one to get a better view of the market.
• The Zigzag indicator doesn’t perform well in ranging or sideways markets.
• The zigzag indicator settings depend on market deviation and depth. The default settings with many brokers are 5% for market deviation, 12% for depth, and 2 for backstep. This can be adjusted depending on the trading style.
• Market depth represents the history of the chart bar series and it will need to be considered enough data.
• Market deviation represents the percentage change that is needed to change the gin trendline from being bullish to bearish.
• Backstep is the minimum number of candlesticks between highs and lows.
• The Zigzag indicator should always be used with another indicator. This helps in reducing even more the market price fluctuations.

Watch the Zigzag indicator strategy trading video to understand more.

Relevant resources

Zigzag indicator