The Zig Zag indicator is a useful tool when it comes to visualizing past underlying trends in the price and can make the process of using drawing tools easier.
The Zig Zag indicator is a useful tool when it comes to visualizing past underlying trends in the price and can make the process of using drawing tools easier. The indicator consists of a series of lines connecting points where the price deviates more than a specific percentage from a maximum/minimum point ultimately connecting local peaks and troughs.
The proposed indicator estimates peaks and troughs by using rolling maximums/minimums with a window size determining their significance. This window size approach allows us to have an indicator that works with a certain regularity no matter the scale of the price, something the percentage-based approach struggles with.
Additionally, one upper and lower extremity are displayed, highlighting the price point that deviates the most from the Zig Zag lines.
The Zig Zag indicator is commonly used to returns points of references for the usage of specific drawing tools, such as Fibonacci retracements, fans, squares...etc.
A common usage also includes the easy determination of Elliot wave patterns in the price.
The Zig Zag indicator above highlights a down-trending motive wave.\
The novel approach taken by this Zig Zag indicator is the addition of two extremities derived from the distance between the price and the Zig Zag line, thus returning channels. It is uncommon seeing extremities in Zig Zag indicators since the line connecting peaks and troughs has rarely any other utility than seeing trend variations with more clarity and is not meant to provide an accurate estimate of underlying local trends in the price.
This channel can be useful to study the potential relationship between underlying trends and the Zig Zag line. A low width between the Zig Zag and the upper extremity indicates price variations mostly located below the Zig Zag while equal width indicates more linear trends.
When the indicator is extended to the last line, the extremities provide potential support and resistances, thus making this indicator able to forecast price variations.
You can find the indicator here