The FX market has a regular pace. Therefore, identifying the patterns becomes hard sometimes, for the most seasoned traders also find it difficult. Hence, many traders use the Zig Zag pattern as their core component of trading strategy since the pattern is utilized to have a considerable impact. The Zig Zag pattern is a leading indicator that prioritizes the significant fluctuations via turning down irrelevant movements.
The Zig Zag pattern indicator enables the traders to clutch the profitable trades and defend the position from winding up over minor movements in the market. The tool is substantially effective in diminishing the market noise. It supports the traders to figure out the swing highs and swing lows with ease but in precision.
The following section will demonstrate the complete Zig Zag trading strategy guide, including exact buying and selling trading methods.
Three things to know before starting:
- The Zig Zag pattern uses the fractal nature of the financial market.
- This trading method is suitable for beginner to advanced traders.
- Close attention to price action and other indicators is important to eliminate unexpected false signals.
What is a Zig Zag pattern?
The Zig Zag is so outstanding for the traders who prefer indicators using swing highs and lows. It is a technical tool to discover when an asset’s price trend will reverse. It also advantages the traders as it defines the support and resistance; thus, it figures out the major price changes and filters the minor fluctuations. Moreover, all of these play a significant role in eliminating the daily noises in the market.
Furthermore, the Zig Zag pattern is fixed at 10%, and all the movements are within 10%. If the price movements go beyond 10%, it only shows a sign on the chart. Moreover, another significant point is that the Zig Zag pattern does not have the power to anticipate anything since the line it shows is entirely dependent on the previous behavior of the market.
Removing minor movements allows traders to see a more comprehensive picture of what is happening in the market to have winning trades.
How does the Zig Zag pattern work?
In analyzing the historical or previous data, the Zig Zag indicator is very efficient. Regardless of being based on retrospect and not having the anticipation power, the tool is comparably convenient and effortless. It has no power to predict any upcoming swing highs or swing lows. Still, the market participants can use it in several manners.
Traders may conjoin the Elliot waves counter with the Zig Zag pattern; thus, it’ll work as a confirmation tool. Besides, the market participants need to draw the line for imaging the running trends because the indicator functions manual, not automatic.
However, the indicator is helpful to define the price trends due to its ability to diminish the casual fluctuations in the price. It also signals the changes in the trends. If the price movements amidst a swing high and low get more than 10%, only the Zig Zag lines emerge.
The filtering facility allows traders to define the trends effortlessly in all the time frames. But on a cautious note, traders must be enlightened that the Zig Zag line may have a fleeting issue. The indicators plot the new line while the price direction changes. The line is pulled out and returned by a broader Zig Zag line in the primary direction in the trend if the line does not outstretch the percentage and the asset’s reverse directional price.
How to trade using the Zig Zag pattern?
Using the pattern on the trading strategy is very simple. This strategy will use the market’s swing levels for entry and exits. Also, we are adding one more tool called the Fibonacci extension indicator to confirm the ABCD pattern of the market. However, the market participants can also use the Fibonacci extension indicator for trade management.
Firstly, we need to ensure that the Zig Zag indicator shows the more effective swing high and swing low levels in the market. That’s why we will set the Depth to 20 periods and the Deviation to 5% to show the swing levels more correctly.
To plot the Fibonacci extension line, we want three perspectives. When the initial two waves of the Zig Zag pattern have been created, we’re offered three swing levels. We will utilize them to draw the Fibonacci expansion levels. We utilize the Fibonacci extension levels to attempt to guess where the last swing wave of the Zig Zag pattern will frame.
Bullish trade setup
Entry
Enter a buy trade when the price had an impulsive bullish candle close after creating a swing low between 0.618 – 0.786 or 1.0 – 1.272 level.
Stop loss
Place the SL order below the swing level with a 10-15 pips buffer.
Take profit
Take the profit when the trade achieves a 1:3 risk/reward ratio.
Bearish trade setup
Entry
Enter a sell trade when the price had an impulsive bearish candle close after creating a swing high between 0.618 – 0.786 or 1.0 – 1.272 level.
Stop loss
Place the stop-loss order above the swing level with a 10-15 pips buffer.
Take profit
Take the profit when the trade achieves at a 1:3 risk/reward ratio.
Pros and cons
| Worth to use | Worth to getaway |
| User-friendliness of this pattern To decipher market trends, the Zig Zag pattern is convenient. | Incomplete indicator Sole application of the Zig Zag pattern is insufficient to some extent. |
| Effectiveness of the pattern The pattern helps to experience easy and effective charting by withdrawing insignificant data. | Lagging Indicator Due to the lagging effect, the Zig Zag pattern fails to depict the changes as fast as the position changes. |
| Effortless trading method The pattern improves the effortless application of different indicators. | Future price changes It only shows the previous price changes. |
Final thoughts
Implicating a successful Zig Zag pattern can be a little unreasonable, yet it can bring about a handsome outcome. Although the pattern is highly accepted for the power to remove the complicated market movements, it is suggested to use it as combined with other indicators.
The pattern is convenient to be utilized by a professional trader as a part of their overall strategy since it is voluntarily accessible in the prominent trading platforms, and they kept it supremely customizable. Therefore, novice traders can apply the Zig Zag pattern effectively.