The zig-zag indicator is a basic technical tool that helps traders to find when a price structure’s trend is reversing. Once you know the structure’s support and resistance areas, it helps to identify significant movements in the prices, and then filtering out short-term fluctuations, we get to know a smooth direction of the trend eliminating the market noise.
The ZigZag indicator is more helpful for Swing and short-term traders who tend to exit on trend reversal with trailing their Stoplosses.
The Zig Zag Indicator
To use the zig zag indicator, a percentage of price movements must be set. Although the default value for a zig-zag is 5%, a setting of 10% would ensure that only price fluctuations of 10% or more would be shown in the chart with a line plotted overlapped on the price as shown in the above image. This eliminates smaller price swings and allows the analyst to see the bigger movements and act accordingly.
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