Zig Zag Indicator For Binary Options
The Zig Zag Indicator is a trend following indicator often used in wave analysis. It measure retracement of trend and weeds out short term fluctuations. Find out how to use this indicator with binary options.
The Zig Zag, or ZZ as I will refer to it, is a trend following indicator that tried to weed out random short term price fluctuations in favor of longer term reversal. The indicator works on the simple premise that it will change direction when the underlying assets has changed direction and moved more than X amount. This produces a series of straight lines that produce a pattern that zigs and zags across the chart. This indicator is used to trade all kinds of assets and is most commonly applied to wave analysis as a coincident indicator. Because it relies on a large movement in order to trigger a change in the indicator it is rather backward looking and may not be the best indicator for short term traders.
How It Works
The calculations for a ZZ line are different based on different types of charts. Line, dot and mountain style charts are based on closing prices so the ZZ line is based on those same closing prices. Candlesticks, OHLC and other charts that show an assets high/low range will be based on the range. ZZ lines based on the high/low range are more sensitive to price movement than those based on just the close because the range from the high to low is likely to larger than the range from one close to the next. The indicator is usually set to certain dollar or % amount. My charts come at the standard setting of $1. This means that the indicator will not change direction unless the asset moves $1 in the opposite direction. I prefer a % amount,as it will vary naturally with the price of the asset while a dollar amount will have to be adjusted manually as the asset appreciates and depreciates. Lines are drawn from the high of the peak to the low of the trough, or vice versa as the case may be. Once the line changes direction it will remain in that direction until price reverses by the set margin again. Traders need to be careful of the last line in each series because it is not set and could change if asset prices change.
Why This Indicator Doesn’t Suck
This indicator doesn’t suck because it is a valid trend following device. It measure long term movements and filters out short term price fluctuations. The formulation is simple and so is the analysis. When the ZZ line is trending up the asset is trending up, when it is trending down, the asset is trending down.
Why This Indicator Might Suck
This indicator might suck because it is not much of a signal provider. In order for the it to change direction, ie provide a potential signal, the underlying asset has to make a large move. By the time the indicator does change direction the move could be over.
My Last Thoughts On The Zig Zag Indicator
I think that this is a good tool for binary traders. I also think that it is not something to base an entry on. The signal it provides is backward looking and does not provide much insight into short term direction. However, as a trend following and coincident indicator it finds its best use. A long term analysis of the ZZ line, its peaks and troughs, provides a clear indication of trend. Use it to determine the direction of your trades, then use something else to determine entry for those trades. Since my chart uses the $ version, I have added the Average True Range indicator and will use it to determine the setting for the ZZ.
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