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What is Zig Zag Indicator: Discover Trend Lines in Crypto

2021-12-22 08:34:09

The Zig Zag indicator is a chart indicator that identifies trend lines in the price of cryptos such as Bitcoin (BTC). The indicator is used to identify only two trends: upward and downward. If the crypto is moving upward, the Zig Zag indicator shows an upward trend from the moment it rises out of the previous downtrend trend until it reverses.

The indicator appears as a straight line on the chart. A trader could adjust the Zig Zag indicator to see short term and long term trends. The Zig Zag indicator can be used for short-term bot trades and long-term investments. It can identify trends on the 5m, 30m, 1H, 4H, 1D, and 1W charts.

Zigzag Indicator

How Does the Zig Zag Indicator Work?

The Zig Zag indicator is an excellent indicator in volatile markets such as crypto, because the trend lines are shifting and a trader can know when the trend has ended and starts reversing. The downside is that this is a lagging indicator — the lines are drawn after the trend has shifted.

ETH-USDT Zig Zag indicator
Zig Zag indicator showing green trend lines at the ETH/USDT pair.

Effectively, traders only know a trend has ended after the trend pattern is broken and not in advance. The Zig Zag indicator works on percentage rises in price movement. For example, the trader can set a 5% or a 30% price movement. The lines are then drawn to mark the trend reversal.

Let’s say a trader wanted to focus on a 20% price movement to determine if it’s a good price to buy or sell. The trader could set the value on the Zig Zag indicator to 20% and they would see when there is a 20% move on the chart. If they want to see smaller price movements such as 5%, they can adjust the indicator accordingly.

Where is Zig Zag indicator used?

The Zig Zag indicator is used in the crypto, stock, and forex markets. However, in non-crypto markets, the closing prices are used to draw trend lines. In crypto, the markets are always open and the trading goes on 24/7, so trend lines can only be drawn when there are price fluctuations that meet the trader’s criteria.

The indicator is often used in combination with RSI, Fibonacci, and Elliot Wave indicators to identify sudden impulse waves that form certain patterns that oppose the larger trend not shown in the long term Zig Zag indicator lines.

The indicator is not used to predict future trends in the price of crypto, but it is used to identify support and resistance levels. Traders can use this to compare historical lows and highs and draw up future projections to prepare for retracements and upward momentum. The Zig Zag indicator reveals patterns when used in conjunction with other indicators.

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How to Trade the Zig Zag Indicator?

Let’s consider an example of using the Zig Zag indicator. It is a free indicator available to all Phemex users under all trade pairs.

  • Choose a trading pair, such as BTC/USDT, ETH/USDT or SOL/USDT.
  • Choose the chart you want. If you’re trading for the long term, choose 1D or 1W charts.
  • Click on “Indicators,” find “Zig Zag,” and click on it to activate it.
  • Adjust the price % movement in the settings when you click on “Zig Zag” indicator.
  • Draw a new trend line on the existing lines.
  • Plan your trading strategy according to the new trend.

To use the Zig Zag indicator on Phemex, open your favorite trading pair. For this demonstration, we’ll use the most traded BTC/USDT pair. At the time of writing, BTC is trading at $56,100:

BTC-USDT pair chart

Click on “Indicators” at the top of the chart and a new window will pop up. Input “Zig Zag” in the search bar and you will find the indicator:

choosing the indicator in the chart

Click on the indicator and the chart will be filled with trend lines. In this example, we are using the daily chart for the Zig Zag indicator. If we switch to any other time on the chart, the indicator will adjust accordingly. Here is what the Zig Zag indicator trend line looks like on the daily BTC/USDT chart:

Zig Zag indicator trend line
Zig Zag indicator trend on the daily BTC/USDT chart

The last several days are not charted, because the Zig Zag indicator is a lagging indicator and they will be charted after the trend pattern is confirmed. In this case, BTC seems to be heading downwards, but this pattern will not be confirmed unless it hits into the lower $50,000s.

This is how the Zig Zag indicator looks on the hourly chart:

adjust the price deviation, for ZigZag indicator
Zig Zag indicator trend on the hourly BTC/USDT chart

To adjust the price deviation, a trader can press on the “ZigZag (5, 10)” indicator bar on the top left and go to “Settings.” This will prompt a settings bar where custom price settings can be inputted.

Why Use the Zig Zag Indicator?

The reason the Zig Zag indicator exists is to help traders discover trends in the price movement and ride those trends out. The main thing a trader should be focused on when using Zig Zag indicators is the trend.

If the trader notices that the price of Bitcoin is on an upward trend, they should adjust their strategy accordingly. There will always be minor price movements that occur within the trend, but a good trader has to know how to not focus on the noise and follow the trend.

The main issue with trading using Zig Zag patterns is that it can be difficult to determine if you are in an upward trend or a downward trend. If Bitcoin or other cryptos are going sideways, a trader must use other indicators to find out if Bitcoin is going to go up or down.

The flexibility of the indicator means traders can adjust it to their trading style. For example, a trader who only places long term trades can adjust the indicator for 15% moves to reassure themselves that their long or short trade is following the trend.

Likewise, a trader using a bot to place short-term trades can adjust their bot according to short term trend lines on the indicator for price movements in the 1–3% area.

The most commonly used deviations for Zig Zag indicators are 5% and 10%. This is a solid price basis that sets a precedent for a bigger price move, while weeding out small 2-3% price fluctuations that might indicate the crypto is going sideways. As long as the trader has a general idea about the current trend of the price movement, they can adjust their strategy accordingly.

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Disadvantages of Zig Zag Indicators

The main disadvantage of this indicator is that lines are drawn after the trend occurs. If you view the trend lines above, you will notice there are no trends for the current price of Bitcoin. The trader has to decide if the price of a crypto is in an upwards or a downwards trend in real time. This is why Zig Zag is known as a lagging indicator.

The Zig Zag trend line will not be an indicator of future price action. If Bitcoin was on an upward trend before the new line starts, it does not mean that it will continue in an upward trend. The changes are not permanent, and when the price changes direction according to the % set, it starts drawing a new line.

The lines can also change while they are being drawn. The line that is furthest to the right and the closest to the current price can be changed. For example, if the price of Bitcoin moves downward and the last trend was upward, the line will go down until the trend is broken and the price threshold is met.

All moves below the price threshold set by the trader will be ignored. We recommend setting price thresholds of 5-10% to get a general sense of the current direction of the coin. Price movements in this area are ideal for planning mid-short term trades. This indicator is best used when combined with other indicators.

Combining Zig Zag with Other Indicators

The Zig Zag indicator can be combined with other indicators to help you plan out your trades. The best indicators to combine with Zig Zag are popular indicators like RSI (Relative Strength Index) that will show you when a crypto has been overbought or oversold.

If a crypto is overbought, it’s a good indicator that it might go down after a parabolic rise. If a crypto is oversold, it’s a good indicator that it might go up. For this demonstration, we combined RSI with Zig Zag trends:

Zig Zag and RSI
Using Zig Zag and RSI Indicators

Notice how the RSI indicator below was implemented underneath the candles on the BTC/USDT pair while the Zig Zag trend lines remain above. While the latest Zig Zag trend line is not shown for the current trend, the RSI indicates that Bitcoin is oversold. A quick analysis like this could help a trader make a trade.

What is the Elliot Wave Zig Zag Indicator?

The Zig Zag indicator is used for Elliott Wave trading. The Elliott Wave theory states that the market forms certain psychological sentiment. This is either optimistic or pessimistic sentiment. The sequences are repeated over a certain time period, in different intensities.

This form of trading relies on studying the psychology of traders in a certain time scale. There are usually five waves in a large Elliott Wave: A, B, C, D, and E. The Zig Zag is used to confirm sentiment for the price action, letting a trader make an educated guess for future price movement.

Elliott Wave trading can be used both in bull markets and bear markets:

Elliott Wave and Zig Zag indicator
Identifying Elliott Wave patterns using the Zig Zag indicator.

During a bull market, if a trader identifies a similar Elliott Wave triangle leading from A to E, they can identify the next breakout and long crypto. In a bear market, a similar pattern could identify short potential on cryptos.

How is the Zig Zag used in Harmonic Pattern Trading?

The Zig Zag indicator is one of the most-used for identifying Harmonic trading patterns. Harmonic patterns are similar to Elliott Wave patterns in the sense that they identify harmonic movements in the markets that can be divided in smaller and larger waves.

For reference, this custom Multi Level Zig Zag indicator on TradingView allows traders to see harmonic patterns using the Zig Zag indicator and help them identify when cryptos are about to break out or go down. This is an example of a complex indicator that can be added to an account for free. Traders can use it to plan their next trades on Phemex.

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The Zig Zag indicator is an indicator that helps crypto traders identify upwards and downwards trends for different cryptos. The indicator is a lagging indicator and the lines are drawn after the trends are completed, making it difficult to predict the future trend.

The Zig Zag indicator can be activated on any pair on Phemex by pressing on “Indicators” and locating “Zig Zag.” The trader can adjust the price deviations they want at any time interval of choice. This can help them make successful trades when they combine it with other popular indicators.

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