what is the zig zag indicator 
the zig zag indicator lowers the impact of random price fluctuations and is used to help identify price trends and changes in price trends understanding the zig zag indicatorthe zig zag indicator plot points on a chart whenever prices reverse by a percentage greater than a pre chosen variable an analyst can set the percentage level to trigger the indicator straight lines are then drawn connecting these points the indicator is used to help identify price trends it eliminates random price fluctuations and attempts to show trend changes zig zag lines only appear when there is a price movement between a swing high and a swing low that is greater than a specified percentage often 5 by filtering minor price movements the indicator makes trends easier to spot in all time frames the zig zag indicator is often used in conjunction with elliot wave theory to determine the positioning of each wave in the overall cycle traders can experiment with different percentage settings to see what gives the best results for example a setting of 4 may define waves more clearly than a setting of 5 stocks have their own patterns so it is likely that traders will need to optimize the zig zag indicator s percentage setting to suit those securities although the zig zag indicator does not predict future trends it helps to identify potential support and resistance zones between plotted swing highs and swing lows zig zag lines can also reveal reversal patterns i e double bottoms and head and shoulders tops traders can use popular technical indicators such as the relative strength index rsi and the stochastics oscillator to confirm whether the price of a security is overbought or oversold when the zig zag line changes direction a momentum investor might use the indicator to stay in a trade until the zig zag line confirms in the opposite direction for example if the investor holds a long position they would not sell until the zig zag line turns downward the zig zag indicator formulazigzag hl c h a n g e x r e t r a c e false l a s t e x t r e m e true if c h a n g e x plot zigzag where hl high low price series or closing price series c h a n g e minimum price movement in percentage r e t r a c e is change a retracement of the previous move or an absolute change from peak to trough l a s t e x t r e m e if the extreme price is the same over multiple periods is the extreme price the first or last observation begin aligned text zigzag text hl change x retrace text false lastextreme text true text if change x text plot zigzag textbf where text hl text high low price series or closing price series change text minimum price movement in percentage retrace text is change a retracement of the previous text move or an absolute change from peak to trough lastextreme text if the extreme price is the same over text multiple periods is the extreme price the first or text last observation end aligned zigzag hl change x retrace false lastextreme true if change x plot zigzagwhere hl high low price series or closing price series change minimum price movement in percentageretrace is change a retracement of the previousmove or an absolute change from peak to trough lastextreme if the extreme price is the same overmultiple periods is the extreme price the first orlast observation zig zag indicator limitationslike other trend following indicators buy and sell signals are based on past price history that may not be predictive of future price action for example the majority of a trend may have already happened when a zig zag line finally appears traders should be aware the most recent zig zag line may not be permanent when price changes direction the indicator starts to draw a new line if that line does not reach the indicator s percentage setting and the price of the security reverses direction the line is removed and replaced by an extended zig zag line in the trend s original direction given the lag many traders use the zig zag indicator to confirm the direction of the trend rather than attempting to time a perfect entry or exit 