Accurate analysis of the schedule – the key to creating a successful strategy, but at this stage problems often arise. Small price fluctuations (price noise, the war of large investors, etc.) are confusing. Taking them as a basis, or vice versa, skipping the main levels of resistance and support, traders draw the wrong shapes. The Zigzag indicator is considered auxiliary, allowing you to filter out a small market noise. For example, when constructing any figures according to the wave theory, traders can construct different charts, taking the main maxima (minima) as secondary and vice versa. ZigZag allows you to bring the graph to the same denominator, eliminating false local peaks and valleys, focusing on the main trend.
Strategy based on Zigzag indicator
The essence of the ZigZag indicator is as follows: it highlights the most significant highs and lows on the chart, connecting them with straight lines and thus ignoring small fluctuations. The indicator is considered auxiliary, because it does not predict future price movements, but only displays significant changes in the past. It is often combined with Elliot waves, fractals or Bollinger bands. You can try to combine it with other indicators, but then the ZigZag is better to use as a confirmation signal. Another positive point in favor of ZigZag is that it is relatively often used in advisors.
ZigZag Indicator Settings:
- Deviation. The lowest value of points, expressed as a percentage between the value of max and min for 2 adjacent candles. If the difference is the percentage (or more) specified in the parameter, then the Zigzag indicator draws a line. If the value is less, then the candle is ignored;
- Depth. The smallest number of candles on which the second maximum or minimum will not be built, if the condition for building by the first parameter is met;
- Backstep. The smallest number of candles between the local maximum and minimum price.
The disadvantage of the indicator is its constant redrawing of the last bend, since the line changes its direction each time according to the ZigZag parameters until the final maximum or minimum from which the next segment begins. Therefore, the proposed strategy uses the DT_ZZ indicator (ZigZag, which does not have a redraw) with a single parameter ExtDepth = 90 and MA (90). The timeframe is H1, the currency pair is EUR / USD.
Conditions for opening a long position:
- the DT_ZZ indicator draws the first maximum after the low;
- The DT_ZZ indicator crosses the MA from bottom to top.
The next candle opens a position with a fixed stop of 40-50 points and Take Profit 10 points.
The conditions for opening a short position are mirrored.
Due to the fact that the Zigzag indicator and the sliding one have the same periods, the final extremes will appear on opposite sides of the sliding one, therefore, the deals will open alternately in different directions. It is not necessary to wait for the foot to trigger. If the market clearly went the other way and this is confirmed by other indicators, it is worth fixing the loss. Join the discussion in the comments!