Zig Zag indicator is used by traders to reduce the "noise" in a trending security. It is very useful in finding price trends, finding support and resistance levels and in evaluating chart patterns like head and shoulders pattern, double tops and double bottoms. Actually Zig-Zag is not considered a true indicator, but as a filtering program to eliminate random price swings of a given period.

There is not an exact formula for zig zag indicator; it is a computer program which wipes out all price movements less than x percent or points. For example if you use a 5% filtering, all price movements of the stock less than 5% will be eliminated from the graph. Traders can also set the zig-zag amount in points. Thus the indicator helps the traders to better explore the market cycles and long-term chart patterns.

Zig zag trading indicator is widely used in Elliot wave analysis. The indicator is a lagging indicator and has zero predictive power. The last leg of the indicator is generated dynamically; it can change as the last leg is not set until the future price is already known. Traders should never use zig zag indicator for generating entry and exit points but for just understanding past price movements. The indicator can offer better results when used with other indicators and chart patterns.

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