Market prices move in a non-linear format and form “peaks” and “troughs” to signal the end-of-trends and the begin-of-trends. Connecting these “peaks” and “troughs” generate a pattern called “ZigZag,” which are used in Elliott Waves to detect various waves, using Fibonacci retracement to detect “price” clustering sequences. “ZigZag” patterns are also used to detect price patterns like “M” and ” W patterns. The construction of “ZigZag” patterns includes finding the key peaks and troughs with pivots and determining the “ZigZag” leg lengths, elapsed time and bar count. “ZigZag” patterns are eye pleasing and tempting but they provide no predictive analysis by themselves. They can be coupled with pattern recognition techniques or some other theories like overlaying on Renko charting to assist with trading.
“ZigZag” patterns do help filter out noise and compare each leg’s size with previous swings to get trend strength. The “ZigZag” patterns use certain variables to validate the pattern such as minimum price movement for points or a percentage, and Average True Range for volatility measurement and “pivot” strengths.
“ZigZag” patterns are used for price cluster generation to determine potential support and resistance areas. They are automatically drawn on charts to plot Fibonacci ratios for prior swings. J.D. Hamon and Michael Gur have published some theories about “ZigZag” and “Symmetric wave” theory trading.
Because “ZigZag” patterns are used only for trend indicators, there are no specific trading rules are provided.
Trading ZigZag Pattern
Trading ZigZag Pattern
The example above illustrates a “ZigZag” pattern from the Russell Emini chart. This chart uses an Average True Range of 10 bars to determine the minimum “ZigZag” move required to compute the trend directions. At each “peak” or “trough,” the number of points or price movement in each swing and the retracement percentage is plotted. For the last swing, the Fibonacci retracement levels are plotted to spot potential support and resistance areas.
Trading ZigZag With Fib.Clusters
Trading Zigzag Fib. Clusters
“Zigzag” patterns do not have any predictability nature. They demonstrate the relative price movements and elapsed time to help other patterns or wave counts. However, there may be some price levels in each swing that could be important support and resistance levels. These price levels can be detected using Fibonacci price clustering methods, where each level is grouped with other price points within a price threshold. These clusters act as attractive support/resistance points for trading. In the chart above, price clusters are auto plotted using the ZigZag swings and a Fibonacci price clustering algorithm to point potential support and
resistance areas (plotted horizontal lines on the right side of the chart).