The Zig Zag indicator is a technical analysis tool that is commonly used in forex trading to identify trends and potential reversals. This indicator helps traders to visualize the overall price movement of the market, by filtering out the small and insignificant price movements and highlighting the significant ones. The Zig Zag indicator was developed by Ralph Nelson Elliott, who was a professional trader and is known for his contribution to the Elliott Wave Theory. In this article, we will explain how the Zig Zag indicator is calculated in forex trading.
The Zig Zag indicator is a type of a trend following indicator, which means it helps traders to identify the direction of the trend and the potential reversal points. The Zig Zag indicator consists of a series of lines that connect the high and low points of the price movement. The lines are drawn based on a certain percentage or a fixed number of pips, which is determined by the user.
To calculate the Zig Zag indicator, the following steps are taken:
Step 1: Determine the percentage or the number of pips
The first step in calculating the Zig Zag indicator is to determine the percentage or the number of pips that will be used to filter out the small and insignificant price movements. This value can be set by the trader based on their preference and the time frame of their trading strategy. For example, if the trader is using a daily chart, they may choose a higher percentage or number of pips, whereas if they are using a 1-hour chart, they may choose a lower percentage or number of pips.
Step 2: Identify the swing highs and swing lows
The next step is to identify the swing highs and swing lows of the price movement. A swing high is the highest point of the price movement within a certain period, while a swing low is the lowest point of the price movement within a certain period. The period can be determined by the trader based on their preference and the time frame of their trading strategy.
Step 3: Connect the swing highs and swing lows
Once the swing highs and swing lows have been identified, the Zig Zag indicator will connect them using a line. The line will only be drawn if the price has moved by the set percentage or number of pips from the previous swing high or swing low. If the price has not moved by the set percentage or number of pips, then no line will be drawn.
Step 4: Determine the direction of the trend
After the lines have been drawn, the Zig Zag indicator will help traders to determine the direction of the trend. If the lines are moving upwards, then the trend is considered to be bullish, while if the lines are moving downwards, then the trend is considered to be bearish.
Step 5: Identify potential reversal points
The Zig Zag indicator can also help traders to identify potential reversal points in the market. These reversal points are identified when the lines change direction, from upwards to downwards or from downwards to upwards. These reversal points can be used by traders to enter or exit trades, depending on their trading strategy.
In conclusion, the Zig Zag indicator is a useful tool for forex traders to identify trends and potential reversal points in the market. It is calculated by filtering out the small and insignificant price movements and highlighting the significant ones based on a set percentage or number of pips. Traders can use this indicator in their trading strategy to make informed trading decisions and increase their chances of success.
