Successful binary options traders are always looking for useful indicators to inform their future trades and the Zig Zag indicator is one of the most commonly spotted. A trend following indicator, it is generally used in wave analysis to measure trend retracement and to weed out any fluctuations in the short term in favour of long term reversals. The Zig Zag indicator is based on the premise that it always changes direction when the direction of the underlying asset has changed and moved more than a specific amount. This will produce a pattern of straight lines that appear to zig zag across a technical analysis chart, thus giving it its name. The Zig Zag indicator can be applied when trading a wide variety of assets and is a coincident indicator that is applied most commonly to wave analysis. This indicator is best for longer term traders rather than those who favour short term trading because it requires a larger movement to trigger a change and is therefore quite backward looking.
How Does the Zig Zag Indicator Work?
Depending on the type of chart used, the calculation for the zig zag line will be different. If a dot, mountain or line style chart is used, the zig zag line will be based on the closing prices, while if an OHLC or candlestick chart is in use, the zig zag lines will be based on the high/low range of the asset. These will be more sensitive to movement that a zig zag line based on solely the closing price as the high/low range is more likely to be larger than the range that is found from one closing price to the next.
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This indicator will usually be set to a particular percentage or price amount, with the indicator changing direction once the asset moves over one currency point in the opposite direction. The line will be drawn from the peak’s height to the trough’s low, or vice versa depending on the case. Once there is a change of direction in the line, it will continue in that direction until the price reverses by the specified margin again.
Is the Zig Zag Indicator Useful in Binary Options Trading?
The Zig Zag indicator is a valid device for following a trend, to measure any long term movement and to filter out fluctuations in price over the short term. As it has a simple formulation and analysis process, it is certainly useful in binary options trading. Even relative newcomers to the market are able to see that when the zig zag lines trends up, their chosen asset is trending up, while if the zig zag line is trending down, their asset is doing the same. On the other hand, in order to show a change in direction and to give a potential signal, there has to be a large move from the underlying asset and by the time the line has changed direction it is possible that the move might already be over.
How to Trade the Zig Zag Indicator
The Zig Zag indicator cannot be traded in its own right, however it can be useful when used in conjunction with other signals and indicators in identifying the correct trade type to execute. CCI, EMA, Momentum Indicator or Stochastic Oscillator would all work well in combination with the Zig Zag indicator. Another way to apply this indicator is to use with the RSI indicator. If the Zig Zag indicator is showing a bullish signal and the RSI indicator is going in the same direction across the 2, 5 and 10 minute time periods, a trader can execute a call option, and the same can apply with a bearish signal. The Zig Zag indicator can be fairly profitable in a ranging market if the levels of resistance and support have been reached.
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- Raftopoulos, Spyros. “Zigzag Validity.” TECHNICAL ANALYSIS OF STOCKS AND COMMODITIES-MAGAZINE EDITION- 20.8 (2002): 28-33.
- De Oliveira, F.A., Zárate, L.E., de Azevedo Reis, M. and Nobre, C.N., 2011, October. The use of artificial neural networks in the analysis and prediction of stock prices. In Systems, Man, and Cybernetics (SMC), 2011 IEEE International Conference on (pp. 2151-2155). IEEE.