The Zig Zag Indicator Strategy: How to Make the Most of It in Forex Trading

How do you know if an asset's upward or downward trend is reversing? The zig zag indicator may be a useful tool to answer this question. Traders will use this filter to eliminate unnecessary noise from the price charts and home in on crucial trends rather than oversold or overbought fluctuations. But what does the zig zag indicator even do? Keep reading to find out.

What Is the Zig Zag Indicator?

The zig zag indicator is often described as a filtering indicator. The objective behind this uniquely named method is to avoid the inconsequential price fluctuations in investment and focus on the fundamental trend. Moreover, since it can also be utilized to spot support and resistance price levels in a market, it can help determine the start and end of a cycle.

So, generally, zig zag lines will only appear on a chart when the price movement reveals a substantial swing high or swing low (usually around 5%). Because of this, traders can ignore the minuscule price adjustments of a few percentage points, making it easier to notice trends unfolding throughout a session.

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Trading in Forex With the Zig Zag Indicator

The initial steps are simple enough:

1. Pick your swing high (a security's price peak) or swing low (a security's low is lower than previous settlements)
2. Figure out the percentage of price movements
3. Locate new highs and lows
4. Create a trendline (a line over highs or lows to highlight the direction of the price)

Remember, most online trading platforms or software maintain input options so that traders can insert parameters of their own zig zag decisions.

Meanwhile, it is important to note that the zig zag is a lagging indicator, so it cannot function as a predictive tool on its own. In other words, you need to complement your zig zag indicator with other indicators to determine the best course of action, such as relative strength indicators (RSIs), buy and sell momentum indicators, and volume indicators.

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Key Takeaways

Indeed, the forex market can have too much noise for some investors. It can be hard to discern what is truly happening in FX when there is so much concentration on the little things, and everyone starts forgetting about the much bigger picture.

Fortunately, a zig zag indicator may help ensure that your forex trading strategy will not fall prey to these incessant noises and lead to foregoing your larger picture because of something that will die down almost immediately.