Thursday, July 28, 2011


Zig Zag is trend following indicator that helps define what the trend has been, and can be used as a significance test to help determine when changes in the current price might indicate when the trend of price might be changing.  The zig zag indicators filters out changes in a data item that are less than a specific amount that you define.  Below is a chart of National Semiconductor.  If you bought every time the zig zag moved up and sold every time the zig zag moved down, every trade would be a winner.

Unfortunately, you can't, because the zig zag indicator does not set the last leg until future prices are already known.  The zig zag indicator is useful for getting a sense of overall trend in prices or on a security.  A zig zag indicator only plots the next leg when a certain percentage or point change has occurred.

Swing Highs: When a price (usually close) is both higher than the price previous to it and after it.

Swing Lows: When a price is both lower than the price prior to it and lower than the price following it.

The Zig-Zag indicator can use both percentages or points in its construction. To construct the Zig-Zag indicator, there must be a certain percentage or number of points between a swing high and a swing low before a line will be drawn. The chart below of the E-mini Nasdaq 100 Futures contract visually illustrates the difference between a price retracement Zig-Zag of 3% and a price retracement Zig-Zag of 5%: