ZigZag
Learn how ZigZag helps identify trend changes by filtering out smaller price movements, enhancing your understanding of market trends and patterns.
What Is the ZigZag?
The ZigZag feature on SharpCharts is not an indicator per se but rather a means to filter out smaller price movements. A ZigZag set at 10 would ignore all price movements less than 10%; only price movements greater than 10% would be shown. Filtering out smaller movements allows you to see the forest instead of just trees. It is important to remember that the ZigZag feature has no predictive power because it draws lines based on hindsight. The predictive power comes from applications such as Elliott Wave, price pattern analysis, or indicators. You can also use the ZigZag with retracements to identify Fibonacci retracements and projections.
How To Calculate the ZigZag
The ZigZag is based on the chart “type.” Line and dot charts, based on the close, will show the ZigZag based on closing prices. High-Low-Close bars (HLC), Open-High-Low-Close (OHLC) bars, and candlesticks, which show the period's high-low range, will show the ZigZag based on this high-low range. A ZigZag based on the high-low range is more likely to change course than a ZigZag based on the close because the high-low range will be much larger and produce bigger swings.
The parameters box allows you to set the sensitivity of the ZigZag feature. A ZigZag with 5 in the parameter box will filter out all movements less than 5%. A ZigZag(10) will filter out movements less than 10%. So, if a stock traded from a reaction low of $100 to a high of $109, it would be a 9% move—there wouldn't be a line because the move was less than 10%. If the stock advanced from a low of $100 to a high of $110 (+10%), there would be a line from $100 to $110. If the stock continued to $112, this line would extend to $112 (100 to 112). The ZigZag would not reverse until the stock declined 10% or more from its high. From a high of $112, a stock would have to decline 11.2 points (or to a low of $100.8) to warrant another line.
The chart below shows a line chart with a 7% ZigZag. The early June bounce was ignored because it was less than 7% (black arrow). The two pullbacks in July were ignored because they were much less than 7% (red arrows).
You may notice that the last ZigZag line is up even though the security advanced just 4.13% ($43.36 to $45.15). This is a temporary line. The security would have to move to $46.40 for a 7% gain to warrant a permanent ZigZag line. Should it fail to reach the 7% threshold on this bounce and decline to below $43, the temporary line would disappear, and the prior ZigZag line would continue from the early August high.
Elliott Wave Counts
The ZigZag feature can filter out small moves and simplify Elliott Wave counts. The chart below shows the S&P 500 SPDR ETF (SPY) with a 6% ZigZag to filter moves less than 6%. After some trial and error, 6% was deemed the threshold of importance. An advance or decline greater than 6% was deemed significant enough to warrant a wave for an Elliott count. Keep in mind that this is just an example. The threshold and wave count are subjective and dependent on individual preferences. Based on the 6% ZigZag, a complete cycle was identified from March 2009 until July 2010. A complete cycle consists of eight waves, five up and three down.
Learn More. Elliott Wave Theory
Retracements and Projections
SharpCharts users can choose between the normal ZigZag and ZigZag (retrace). The normal ZigZag shows lines move at least a specific percentage. The ZigZag (retrace) connects the reaction highs and lows with labels that measure the prior move. The numbers on the dotted lines reflect the difference between the current ZigZag line and the ZigZag line immediately before it.
For example, the chart below shows Altera (ALTR) with the 15% ZigZag (retrace) feature. Three ZigZag lines are labeled (1, 2, and 3). The dotted line connecting the low of Line 1 with the low of Line 2 shows a box with 0.638. This means Line 2 is 0.638 (63.8%) of Line 1. A number below 1 means the line is shorter than the prior line. The dotted line connecting the high of Line 2 with the high of Line 3 shows a box with 1.646. This means Line 3 is 1.646 (164.6%) of Line 2. A number above 1 means the line is longer than the prior line.
As you may have guessed, seeing these lines as a percentage of the prior lines makes it possible to assess Fibonacci projections. The August decline (Line 2) retraced around 61.8% of the June–July advance (Line 1). This is a classic Fibonacci retracement. The advance from early September to early November was 1.646 times the August decline. In this sense, the ZigZag (Retrace.) can be used to project the length of an advance. Again, 1.646 is close to the Fibonacci 1.618, the Golden Ratio used in many projection estimates.
Learn More. Fibonacci Retracements
The Bottom Line
The ZigZag and ZigZag (Retrace.) filter price action and do not have any predictive power. The ZigZag lines simply react when prices move a certain percentage. Chartists can apply an array of technical analysis tools to the ZigZag. Chartists can perform basic trend analysis by comparing reaction highs and lows. Chartists can also overlay the ZigZag feature to look for price patterns that might not be as visible on a normal bar or line chart. The ZigZag has a way of highlighting the important movements and ignoring the noise. When using the ZigZag feature, don't forget to measure the last line to determine if it is temporary or permanent. This line is temporary if the current price change is less than the ZigZag parameter but becomes permanent if the price change is greater than or equal to the ZigZag parameter.
Using ZigZag With SharpCharts
The ZigZag and ZigZag (retrace) can be found in SharpCharts as a price overlay in the Chart Attributes section or as an addition to an indicator. The parameters window will appear empty after selecting the ZigZag feature from the dropdown box. Five (5%) is the default parameter, but this can change depending on a security's price characteristics.
Some securities produce too few ZigZag lines at 5%, so the default is set lower (e.g., 3.75%). Some securities produce too many ZigZag lines at 5%, so the default is higher (e.g., 6.25%). The ZigZag parameter can be seen in the upper left corner of the chart. Once the ZigZag feature is applied, you can adjust the parameter to suit your charting needs. A lower number will make the feature more sensitive, while a higher number will make it less sensitive.
Additional Resources
ChartSchool Articles
Swing Charting Learn how to use the ZigZag overlay when swing trading.
Recommended Books
Robert Prechter's Elliott Wave Principle introduces the fundamental concepts and techniques of Elliott Wave Theory and serves as a comprehensive yet accessible handbook for traders interested in this market forecasting technique.
Elliott Wave Principle Robert Prechter |
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