The ZigZag Indicator is an excellent tool if you’re looking to trade chart patterns like Fibonacci retracements, Elliot waves or any kind of pattern that uses the concept of a swing high or swing low.
In this 5 minute video we’re going to discuss the ZigZag indicator, which is one of the default indicators that comes in your MetaTrader 4 platform.
A swing high is essentially the highest high among a set of bars. Take this picture, for example. You can see that before the price shot off on a strong trend, there was a retracement down to this point. The low point is what traders call the “swing low” and the high point is called the “swing high”.
The ZigZag applies to the chart like any other MT4 indicator. Go to the Navigator window and click on the plus sign next to “Custom Indicators”. Scroll down to the bottom or push “Z” on your keyboard. ZigZag will be at the end of the list.
Drag and drop the file from the list onto your chart. You’ll see a screen like this pop up. Don’t worry about the settings. I’ll get into that once you have the basic concept down.
Push ok. The first thing you’ll notice are these lines all over the chart. They’re peaks and valleys that the indicator automatically detects as swing highs and lows.
Many a novice trader looks at this indicator and wonder if this is the holy grail. The highs and lows in the perfect are 100% accurately depicted on the graph. Before you get too excited, the ZigZag cannot predict the highs and lows in advance. Nothing about this indicator makes predictions.
In fact, this indicator repaints. Do you see this high here on the chart? Well, the ZigZag started drawing the high here. Then, when this high was made, it deleted that point and said, “Oh no, no.” The new high is here. Everytime the market makes a new high, the ZigZag deletes its last drawing and replaces it with the higher high. Again, I’m only saying this to highlight that the indicator does not make predictions.
The power of this tool is that it consistently draws historical highs and lows in the same way. Fibonacci traders can use the historical moves to draw extension and retracement lines only between the points that the ZigZag identifies.
You’ll often find that two Fibonacci traders don’t agree on the swing high and low. If any of those points differ, then of course the retracement and extension lines also differ. In fact, it might even be you, the same trader, that draws different Fibonacci lines on the same prices!
Let’s look at a chart and say that both traders agree that this point forms the bottom. Trader 1 may argue that this point is the top because he prefers short term setups. Trader 2 is longer term, so he may feel that the swing high is really here.
Using a ZigZag line adds consistency to your trading, which is essential for removing mistakes and evaluating performance. If the line draws the same way on every occasion, then you can analyze entries on retracements to improve entry and exit points.
The starting point is to find ZigZag settings that match what you would draw as a discretionary trader. If you think these lines are too aggressive, you can change the settings by right clicking on the chart and choosing Indicators, then ZigZag. Click edit.
The Depth input is the one you’ll most likely want to change. It’s default is 12. If you want something slower, that would require a bigger number. Putting in a number like 25 makes the chart draw like this.
Some of the lines that were on the chart earlier have disappeared. The action is more smooth, although there are also fewer swing highs and lows identified. Finding the right combination will depend on your experience as a discretionary trader.
I hope you found this to be a useful introduction. Again, if you’d like get a free demo account, you can get one for free by clicking the link below this video.