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AlfaTrade: Zig Zag Trading Strategy Explained

When trading on the Forex, traders are exposed to a trading platform and market that allows for a substantial amount of flexibility in how the trader will develop their trading strategy. Because trading is done based on the movements of currency pairs, it presents the opportunity to make money regardless of the current economic environment. As with any form of trading, it is imperative that the trader develop a trading strategy that has the capacity to produce consistent positive results. Currently, there is no shortage of trading strategies being used in the Forex market. One of the most popular and effective trading strategies being used in the Forex is the Zig Zag method. Zig Zag is actually an indicator, and the strategy associated with it involves using the indicator to clean up unwanted data noise.

The Basic Function of the Zig Zag Indicator

With the Zig Zag method, traders use the Zig Zag indicator to filter specific directional shifts in price movements. What this filter does is clear unnecessary noise from analytic price charts that have no bearing on trade qualifications — exposing the most relevant trends — while eliminating insignificant variations and fluctuations. While this system does exceptionally well at performing the job it was designed to do, it is immensely less ambitious than other programs, which disqualifies it as a mechanism that can be used as an autonomous trading system. This system is at its best when it is allowed to identify specific trends that can be further analyzed using other analytic tools, such as tools offered by Forex trading platforms like AlfaTrade — confirming potential trend reversals and highlighting relevant patterns.

How the Zig Zag Indicator Works

One of the most praised benefits of the Zig Zag indicator is its ease of use, with most traders and analyst agreeing that it is very easy to understand and use. What this system does is identify insignificant price shifts and variations, predominantly qualified as being below 10 to 20 percent, and then removing these trend fluctuations from the trend lines, using a highly defined filtering process.

Another powerful benefit associated with using this system is the fact that it can be easily integrated with a vast majority of trading software or online programs, allowing traders to set the parameters for the Zig Zag preferences. In other words, it is easy for traders to set the preferences for how the filtering system of the Zig Zag program will function.

It is important that traders understand that the higher the filter threshold is set, the less sensitive the indicator will be, and the more clutter will end up on the analytic charts that are being used to determine the right trades. It is also possible to set the preferences where they are too sensitive. While setting the preferences too high will result in too much noise, setting it too low could result in losing out on the opportunity to enter some highly profitable trades. Generally, most default settings have the threshold set between eight and 15 percent.

Trading on the Forex with The Zig Zag Indicator

Again, it is extremely important to understand that the Zig Zag indicator is meant to be a complementary tool that works to enhance the performance of other, more ambitions, trading programs, and it should never be used as the primary mechanism through which traders choose their trades. This system is most commonly used to complement Elliot Wave or Fibonacci trading systems. This system is very popular with swing traders because it provides the support that allows them to effectively analyze specific entries on retracements.

In order for a trader to be successful on any type of trading platform, it is absolutely imperative that they develop a high level of consistency, and the Zig Zag system is one tool that can definitely help to increase the consistency in which a particular trading strategy performs. The more consistency that is experienced at the front end of the analytic process, the more consistent results will be experienced at the back end of the trade.

The Zig Zag indicator provides a cleaner graph that presents only those trends and movements that will be critical in the decision making process, as far as choosing which trades to enter, and when. Because this system has the ability to eliminate unwanted noise, it allows for the consistent application of other strategies that the trader will be using. Simply put, a great trading strategy will perform much better when the trader does not have to wade through a lot of insignificant information that has absolutely nothing to do with important trends and price movements.

It is important for traders to understand that the Zig Zag system is a lagging indicator, not having the capacity to make any type of predictions of its own. It is designed to help other tools be more effective in predicting how trades will perform. Because of the fast-paced movement of the Forex, the Zig Zag indicator will work best with trading systems that offer leading signals.

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Peter Daniel - Peter Daniel
Peter has written 16 awesome articles.

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