ZZ (ZigZag)
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The ZigZag indicator is a technical analysis tool that can be used to identify classic chart patterns in trading. It is designed to highlight important trends and confirm possible price reversals. It removes price noise that is irrelevant to the trader's analysis. The late investor John Templeton once said that "the time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." This is a simple concept of the ZigZag indicator.
It aims to help traders stay in a winning position and avoid the urge to close positions due to minor reactions that are common in the market. It shows where trends can change. And it is the starting point for deciding to place stops on momentum-based trades, allowing traders to take profits when a trend is strengthening.
The ZigZag indicator is similar to a moving average in that they both signal a trend change when the indicator changes direction, such as when the aggregate price rise becomes a price fall. However, the ZigZag indicator highlights peaks and troughs as they occur, while the moving average is slow to respond to price changes that can cause a delay.
Using the ZigZag trading strategy is also useful when a trader wants to look at a trend over a longer period of time. This can be done by changing the resolution or scale, making the overall market path more visible. It is important to remember that the ZigZag indicator has no predictive power as it draws lines based on hindsight.
The ZigZag is based on the chart type. Line and dot charts, which are based on the close, will show the ZigZag based on closing prices. High-Low-Close bars (HLC), Open-High-Low-Close (OHLC) bars, and candlesticks, which show the period's high-low range, will show the ZigZag based on this high-low range. A ZigZag based on the high-low range is more likely to change course than a ZigZag based on the close because the high-low range will be much larger and produce bigger swings.
Percent deviation – percentage of a price change that is required to change the trend line from positive to negative.
The indicator looks as follows on the chart:
