Using the Zigzag Indicator on the Metatrader Platform

The Zigzag indicator for Metatrader is a basic tool for traders to use to assess the likelihood of a trend reversal in an asset. When used in conjunction with basic support and resistance analysis, it helps identify when a market is actively reversing the trend or slicing through one of those previously laid out levels. It does help eliminate a lot of the noisy conditions that are typically found in a trend and focuses solely on the overall directionality of that move. 

 

The indicator accomplishes this by using a specific percentage of price movement. There are multiple theories on which one you should use, and that is going to be up to the individual trader. However, the basic idea is that if the trend does not change by X percentage, then the trend has not changed at all. It should be noted that the default setting is 5%. 

 

When you apply a Zigzag indicator to a chart, it clears up a lot of the noise over the longer term moves, thereby making it much more effective on longer-term charts than shorter-term charts. It is shown by a simple line on the chart that almost looks like a trend line, but it doesn’t pay attention to the highs and lows of a specific set of candlesticks. It simply draws out the trend. 

Adding the Zig Zag Indicator to Metatrader

Adding the Zigzag indicator to Metatrader is extremely easy to do. As the indicator is already built into the platform, all the trader needs to do is simply click Insert, pull down to the menu to click on Indicators, and then go to the next submenu Custom, and then simply click on Zigzag Indicator.

 

 

At this juncture, a dialog box will appear that allows the trader to change the parameters in the colors as per usual. The most important ones to pay attention to our in the “Inputs” tab, which will give you a Depth, Deviation, and Backstep. The Depth input is the percentage of change that represents when the trend changes. 

For example, if the price drops 5% from the high, then the Zigzag indicator will start to show a red line falling, representing that the trend has in fact changed.

How to Read the Zigzag Indicator

Reading the Zigzag indicator is easy. It simply shows what direction the trend is, so if it’s rising from the lower left to the upper right, therefore rising in price, it shows that the market is in an uptrend. Conversely, if the Zigzag indicator is falling from the upper left to the lower right, it shows that the trend is decidedly negative. 

That being said, it simply tells you the overall attitude of the market, not necessarily a signal as to whether or not you should get into a trade based solely on the direction of the lines on the chart. However, it does give you a basic filter as to which direction you should be looking to trade. (In this sense, it’s used very much like a moving average.)

 

 

When you get the signal that price is moving in a particular direction, the Zigzag indicator is only going to be your “30,000 foot look at the market.” This is because if you are trading an instrument with leverage, in this case currencies, a 5% move in order to change the indicator is rather large. 

It's because of this that a lot of Forex traders will have two choices ahead of them:
 

they can either 
a) use extraordinarily little leverage 
b) change the indicator to a much lower percentage to increase its sensitivity

 

In that sense, the Zigzag indicator tends to work better for other markets if you use the basic settings. Keep in mind, much like most other indicators that Forex traders use, the Zigzag was initially designed to trade stock markets. In other words, it does not necessarily factor in the danger that leverage can bring.

In order to show the difference, we included a chart just below that compares the difference between a 5% change and a 2% change. Notice that the red Zigzag indicator changes direction much quicker than the blue one, because it is configured to change at just a 2% depth.

 

 

Notice on the chart below, the Zigzag indicator tends to turn within the blue rectangles drawn on the chart. This shows you potential zones of support or resistance that the market seems to be interested in. With that being the case, it can provide somewhat of a predictive factor going into the future, because where you see the Zigzag turnaround several times in the same area, it shows you just how strong the rejection of price is. (This is where 5% makes a difference, because it shows a true reversal, and therefore there is an argument to be made for leaving things alone if you can be patient enough to wait for trade signals within these areas.)

 

 

One of the best ways that you can use this indicator in the above example is to wait for your favorite candlestick pattern to appear in that region. While not perfect, it gives you an idea as to the probability of the candlestick pattern working out in your favor. 

 

Traders who use the Zigzag indicator spend a lot of time on the sidelines waiting for the right set up, but some of the world’s best traders of all time will tell you that we are quite often paid to wait for the right set up.

A Few Examples of Using Other Indicators With Zigzag

One of the most obvious things to use with Zigzag is going to be Fibonacci retracement levels. On the chart below, you can see that from the bounce at the extreme low in the New Zealand dollar, there is a Fibonacci retracement tool drawn to the top of the zigzag indicator. Notice the highlighted area on the chart.

 

The market pulled back to the 38.2% Fibonacci retracement level, and then bounced again. This is one way that traders can use Zigzag, a way to place Fibonacci retracement tools. 

 

 

Another way to help filter out some of the noise that the markets can throw at you is to add a moving average to this indicator. There are a couple of ways that you can use the indicator, but the first and most obvious one is to look for the Zigzag indicator to turn at a common moving average to confirm that it is offering dynamic support or resistance. This shows that at least two indicators are telling you the same thing, and therefore it adds to the confluence of events that can have traders looking to get involved. 

The other way is to wait for the Zigzag indicator to turn around after breaching a moving average, and then confirming it. In other words, if it rises above the 50 day EMA and then falls right back down below it, this shows that the market is in fact keeping that trend. It is a rejection of price just above the moving average. This can help you take advantage of traders that are trapped when they got long of a market as we broke above that moving average. Obviously, this works when the Zigzag indicator breaks below a moving average and turns around as well. Remember, moving averages are not like brick walls, so they do not necessarily reject price immediately at all times. 

Take a look at the chart below and notice how many times the Zigzag indicator broke above or below the red 50 day EMA, and then turned around. Those are perfect examples of how to use this indicator with a moving average. Furthermore, we have highlighted the area where markets turned right away at the 50 day EMA with a yellow circle. 

Either one of these strategies can be especially useful and should be tried out with a demo account in order to get comfortable trusting the indicator, and perhaps even learning how to position size your trade properly.

 

 

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.