Some Things to Consider When Using Zigzag
The Zigzag indicator is relatively simple and iuseful. However, like anything else with technical analysis, there are best case uses for it, and it's not necessarily the correct tool in every scenario.
After all, by its very definition there needs to be a trend that you can trade in order to be successful. For example, if you get a back-and-forth type of market on a one hour chart, the Zigzag indicator is going to struggle to fire off appropriate signals, because the lag in waiting for a 5% change will almost by its very definition have you late in the trade. In other words, it skews your risk to reward ratio, which is a killer of accounts down the road. You need to have the ability to make your winners bigger than your losers over the longer term or be right with almost every trade you make.
The Zigzag indicator doesn't take into account anything other than the amount of change in the price of the asset. Yes, price is the most important factor but there are other things that will catch the attention of market participants such as a Fibonacci level, a moving average, or just a large, round, psychologically significant figure such as 1.0000 on a chart.
Beyond that, it also doesn't take into account candlestick price action, or something as basic as a trend line. If there is a trend line break, that will show up and catch the attention of traders much quicker than the Zigzag indicator will. That being said, while the Zigzag indicator is not exactly perfect, it does tend to lend itself quite nicely for bigger moves, so on it's probably best used on higher time frames.
Always keep in mind:
Zigzag tends to perform better with higher time frames.
Zigzag doesn't perform well in choppy sideways markets.
Zigzag doesn't take into account other technical factors.
Zigzag should almost always be used with another indicator, making it a piece of a system.
Zigzag is adjustable, and should be tinkered with to the traders liking.
All of this being said, if used properly, the Zigzag Indicator can be an excellent secondary indicator. For example, if you are looking at a potential pullback in order to start buying, and the Zigzag indicator has already flipped over against that pullback, it tells you that the indicator believes that the market has changed directions.
Remember that a 5% move in a currency of the trend is a reasonable move to start to question things, as markets tend to undulate back and forth over time. In a sense, it is probably better to use Zigzag as a confirmation of a pullback and continuation of a longer-term trend. For example, if price pulls back in an uptrend and then turns around, causing the Zigzag indicator to go bullish again, that is probably a reasonable signal for longer-term traders to start buying and adding to their position again, building up profits along the way.
This is an interesting indicator in the fact that it 's so simplistic. A lot of indicators make things complicated, while the Zigzag is as rudimentary as possible. In that sense, it's a great way to look at the markets because it doesn't rely on anything other than the percentage of movement. There are an unlimited amount of ways to trade the markets, so the combination of indicators that you use can make a huge difference.
The Zigzag indicator certainly is worth testing and does have its uses. However, in and of itself it doesn't make a signal. The only traders that tend to focus solely on Zigzag for a trade signal tend to be longer-term buy-and-hold type of investors. This goes back to the history of Zigzag being originally formulated for stock markets.
Because of this, most traders who like this indicator apply it to daily charts or even higher time frames. It doesn't perform well on the short-term charts, but it was never designed to do so.