ZigZag Trading Strategy - How to Make Money in Forex Fast
There is an easy way to make money in Forex with our ZigZag trading strategy. The zigzag pattern will give you a more unobstructed view of the market price swings on different time frames. You can swing trade, day trade, and even to do scalping with the zigzag pattern. We also have training on the fractal trading strategy, if you are interested.
The markets don’t just move straight up, and they don’t just move straight down. If you spend any more than a couple of seconds in the markets, you may have noticed this before. There’s always waves or price swings, ups and downs, or peaks and valleys that happen inside every price movement.
It doesn’t matter if we’re trading upwards or trading downwards. You’re still going to have this wave price movement. We can use the zigzag pattern to try to find high percentage areas to ride those waves.
The zigzag indicator is an outstanding technical indicator if you’re looking to trade chart patterns. This includes Fibonacci retracements, Elliott Waves analysis, or any kind of price action that uses the notion of wave analysis.
Our team at Trading Strategy Guides has placed the Zigzag indicator in our top 5 technical indicators.
Moving forward, we’re going to discuss the zigzag indicator. We will give you an understanding of how to trade with the Zigzag indicator.
What is the Zigzag Indicator?
The Zig Zag is a technical indicator that measures the swing highs and swing lows of a market. This will help you identify with better accuracy the market swing high and low points. The Zigzag tool is primarily used to filter out the market noise. You can learn how to profit from trading here.
Eliminating the small price movements gives you the ability to see the bigger picture.
The Zigzag indicator parameters are very important to cover enough price data so the indicator can display zigzag waves on your chart.
These are the Zigzag parameters input that you need to figure out:
- Depth – it refers to how far back in the chart bar series it will look. In order to get the highs and lows defined you need to make sure you have enough “Depth.”
- Deviation – what percentage in price change does it take to change the trendline from positive to negative.
It’s important to play around with these parameters until you find the ones that suit your trading style.
But, if the parameters are set to tight, you can have a zigzagging effect. But we want to have a broader view of what the true swing high and swing low are.
When you set the Zigzag parameters you should be looking at three things:
- Price symmetry should give you a nice and uniformly match wave harmonics, namely the AB=CD pattern.
- Wave depth which should give you a good depth of waves between the swing highs and lows.
- Stepping price level, which should make sure that you’re able to spot a trend.
The zigzag indicator is one of the default technical indicators that come with your trading platform (MetaTrader4, TradingView, etc.).
How to Trade with the Zigzag Indicator
The ZigZag swing trading strategy presented below requires the use of one particular indicator. The Fibonacci extension indicator will be used to additionally confirm the ABCD pattern. It will be used for trade management as well.
Now, before we go any further, we always recommend taking a piece of paper and a pen. Note down the rules of this entry method.
For this article, we’re going to look at the buy side.
Step #1: Set the ZigZag indicator settings at 20 for the Depth and 5% Deviation
First, we want to make sure the ZigZag tool will only show the more significant swing high and swing low points in the market. For this, we have to use at least 20 periods for the Depth and 5% deviation to accurately display the market swings.
Now we’re all set to conquer the market swing waves.
Step #2: Plot the Fibonacci Extension line once the first two swing waves are established.
In order to plot the Fibonacci Extension line, we need three points of reference. As soon as the first two waves of the Zig Zag pattern are developed, we’re offered three swing levels. We’re going to use them to draw the Fibonacci extension levels.
The reason why we use the Fib extension levels is to try to anticipate where the last swing wave of the Zig Zag pattern will form.
The zigzag indicator will only mark the swing low as being formed too late for us to rely and base our trades alone on this indicator. This is the main reason we employ different trade tactics. The tactics are used to anticipate where it’s more likely for the zigzag pattern to end.
Step #3: Wait for the third wave to terminate between 0.618 – 0.786 or between 1.0 – 1.272
The reality is that market symmetry doesn’t happen often. The AB=CD pattern requires a lot of precision in order to have all the conditions for this pattern to be valid.
Throughout our backtesting software, we have found out that the third wave of the zigzag pattern ends between 0.618 – 0.786 or 1.0 – 1.272.
Since we can’t know for sure where the third wave will end, we’re going to employ one of our favorite trade techniques to spot a swing point in the market.
Step #4: Wait until you have a candle with a higher low on the right and the left. The bar from the right needs to break above the bar on the left.
The three bar pattern to spot a market swing point is quite easy.
All you need to do is to wait until you have a candle that has a higher low on both the left and the right side of it. In order for this three bar pattern to be confirmed we also need the bar from the right to break above the high of the bar from the left.
To better understand how to spot when a swing low is about to be put in place we’ve made a simple illustration (see above figure).
Now you need for this pattern to develop between 0.618 – 0.786 or between 1.0 – 1.272.
The Zigzag strategy satisfies all the trading conditions, which mean that we can move forward and outline what the trigger condition for our entry strategy.
Step #5: Zigzag Trading Strategy: Buy at the close of the three bar pattern
After the three bar pattern is completed, we don’t want to lose any more time, and we go buy at the market.
Note* We use the three bar pattern to anticipate swing market points with all of our trading strategies.
This brings us to the next important thing that we need to establish for the best Zig zag strategy, which is where to place our protective stop loss.
Step #6: Hide your protective Stop Loss below the three bar pattern.
The stop loss is going to go below the three bar pattern. Your stop loss may be a little bit bigger depending on the time frame you’re trading.
You want to make sure that the three bar pattern where your stop loss goes maintains at least a 2% risk.
You don’t want to risk more than 2% of your account in any given trade.
Last but not least, we also need to define where we take profits.
Step #7: Take profit equal 2 or 3 times more the Stop Loss.
Now, where’s our profit target going?
The classical ABCD pattern essentially keeps you at a 1:1 risk reward ratio. Also, a lot of the times with the ABCD pattern, you’ll see it pretty frequently that those targets areas are front runned.
However, when you trade with the Zig Zag indicator, you’re able to capture two or even three times more the risk taken.
Note** the above was an example of a BUY trade using our Zig Zag trading system. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.
We hope you enjoyed this step-by-step guide on how to use the Zig Zag indicator to time your entry and identify the market swing points. The idea behind this simple strategy is to have a better assessment of the trend so you can make better trading decisions. You can also read our winning news trading strategy.
With the ZigZag trading strategy, you’ll be able to hold onto your winning trades, and you’ll avoid the urge to liquidate your position on any minor pullbacks, which are ordinary in the market.
Thank you for reading!
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