Hello Everyone,
welcome to another week of exciting cryptoacademy courses. I'm really excited to be writing this post especially after the latest changes that have been made with regards to the weekly assignment posts in this community. I believe this new reform will offer members to be able to learn more and definitely earn more. Interesting.....isn't it?
In this post, I shall be providing my analysis to the questions at the end of the lecture given by Professor @kouba on the ZigZag trading indicator. Without much talk, let's get straight underway.
Q1. Show Your Understanding Of The ZigZag As A Trading Indicator And How It Is Calculated:
The ZigZag trading indicator is one of such many indicators employed by cryptocurrency traders in performing technical analysis on market charts for making productive and efficient trading options. It's name rightly suggests how it appears when launched in a price chart(ie, it is Zigzag-like). The ZigZag appearance is a clear indication of how stock prices move in the market as it fluctuates. Hence, this indicator has the ability to accurately describe the major trends that have occurred in a market as well as predict a possible price direction/trend.
This technical analysis indicator has the ability to filter out market noises in price actions, thus making it very easy and simple to detect and identify major trend movements. In view of this, it is often referred to as the "filtering" or "smoothening" indicator. The nature of the ZigZag trading indicator allows it to also be efficient in identifying price levels for for support and resistance in a market/price chart. These two characteristics of the indicator is especially important for crypto traders in determining best positions to enter and/or exit a trade.
The ability of the ZigZag indicator to not consider insufficient fluctuations in price actions helps traders not to be tricked into non-profitable trades.
When launched in a chart, the indicator identifies and displays prominent peak high and low price values and then connects them with broken trendlines. These trendlines are only sensitive to prominent highs and lows, thus, eliminating insignificant market trends
By default, most market charts have a 5% fluctuation limit when applying the ZigZag indicator. Implying, when a price fluctuation is not up to or more than five percent of the price change, it does not register as a strong trend. However too, traders can customize the percentage limits depending on their type of trading.
The image below shows how the ZigZag indicator appears on a market chart:
We notice that the joined diagonal trendlines (zigzag) are not influenced by small and insignificant fluctuations in prices. It easily identifies strong downtrends and uptrends as well.
How The ZigZag Indicator Is Calculated:
The ability of the indicator to identify and plot trendlines depends on the threshold/limits of the price movements. The length of the diagonal trendlines vary from each other depending on the extent/degree of price changes. It gets a proper percentage threshold by using the following mathematical formula/equation:
Nature of Zigzag=[H/L, %Change=MP, Retrace=False, LEP=True]
Where:
- H/L= High or Low prices
- %Change= Change in price fluctuations expressed as a percentage
- LEP(Last Extreme Price)= Changing/variable price
Launch ZigZag when %Change >= MP
From the above formula, it can be inferred that the ZigZag indicator is dependent on the fluctuating swing prices(highs and lows) and the percentage change in these prices. Thus, the ZigZag indicator recognizes and utilizes the apparent changes in prices by connecting the diagonal lines from one swing point to the successive swing points. Eg, it connects a lower low to the next significant higher high and vice versa, making it a zigzag indicator.
Q2. What Are The Main Parameters Of The ZigZag Indicator And How To Configure Them And Is It Advisable To Change It's Default Settings? (Screenshot Required):
The operation of the ZigZag indicator depends on the type of chart to which it is applied. The indicator has mainly two distinguishing parameters: ie, Deviation, and Depth. These characteristics as re complimentary for the effective running of the indicator.
The Deviation component of the indicator refers to the estimated least value of the percentage change in price movements of a stock in a market formed after a previous price level moves to another significant price point before the ZigZag acknowledges the new swing price point as a valid price point.
This helps the indicator to filter/smoothen the various fluctuations occurring in the market chart so as to be able to identify prominent trends.
By default in most trading charts, the percent Deviation of price changes is always 5%. This implies, before a change in a stock price can be acknowledge, it must at least be 5% of the price fluctuations since the previous swing price point.
The Depth component of the indicator represents the estimated least number of price intervals(lines/candles) which is not acknowledged by the indicator, hence, not recognized as a new prominent swing price point. In most scenarios, the default settings is set at 10%.
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How To Configure The ZigZag Indicator Parameters:
To be able to configure the ZigZag indicators, you can choose to use any of the available online market charts that supports the use of indicators. For this reason, let's use the Tradingview platform since it's very user-friendly.
Once you launch the market chart as seen above, click on the indicators option.
A pop out menu with a list of the various indicators appear.
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Search for ZigZag Indicator in the search option and it appears in the chart as below.
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Changing The Default Settings:
The nature of trade has a major contribution to the settings of the ZigZag indicator. Depending on the type of trading done by a person, he/she can always alter the default settings to suit his/her transactions. One can alternate the settings of the indicator based on the teframe, type of asset, as well as the nature of trading.
However, one must always be careful as to the extent of changes made to the default depth and deviation settings since it can render the indicator least effective or lessen it's smoothing and filtering properties.
Q3. Based On The Use Of The ZigZag Indicator, How Can You Predict Whether The Trend Will Be Bullish Or Bearish And Determine The Buy/Sell Points(Screenshot Required):
One of the main uses of the ZigZag indicator is to identify significant trend movements in market prices on a chart. The principles and nature of it makes it adapted for this purpose. As stated earlier, this indicator consists of diagonal lines that merges/connects prominent highs and lows in a moving price chart, thus, the ZigZag appearance.
As explained by the formula for it's calculation, the diagonal trend lines are formed as a result of the relative changes in stock prices from one swing point to the other. It joins the previous significant price point to the next significant price point continuously in the market chart.
Predicting Uptrends:
Uptrends in every market chart are always characterized by successive higher highs and higher lows in asset prices. Using the ZigZag indicator to determine uptrends is quite simple. When launched in a chart, the indicator is seen to move in an upward direction. The diagonal trendlines of the indicator joins the swing values of lower lows to higher lows as well as lower highs to higher highs. This is a classic feature of market uptrends. An example is seen in the below screenshot from tradingview.
Predicting Downtrends:
Downtrends in every market chart are always characterized by successive lower highs and lower lows in asset prices. Using the ZigZag indicator to determine downtrends is quite simple. When launched in a chart, the indicator is seen to move in a downward direction. The diagonal trendlines of the indicator joins the swing values of higher highs to lower highs as well higher lows to lower lows. This is a classic feature of market downtrends. An example is seen in the below screenshot from tradingview.
Determining Buy/Sell Points:
The ability to identify and set profitable buy/sell points is the aim of every rational trader. This is the fundamental basis for all market indicators. Sell order are usually given when a strong bearish signal(strong bearish candle) occurs. Contrarily, buy orders are usually given when a strong bullish signal(strong bullish candle) occurs.
Buy Points:
To determine our appropriate buy point in a chart, let's consider the example below:
From the image above, we can see an obvious change in trend from a downtrend to a sharp uptrend as indicated by our ZigZag indicator. We then set our stop loss at a level where there's a strong bullish candle, with a higher low, hinting a bullish trend. In the figure of the market chart above, I enter a buying order the moment I notice a strong bullish signal after a higher low
Sell Points:
To determine our appropriate sell point in a chart, let's consider the example below:
From the image above, we can see an obvious change in trend from an uptrend to a sharp downtrend as indicated by our ZigZag indicator. We then set our stop loss at a level there's a strong bearish trend. In the figure of the ETHUSDT chart above, I enter a sell order at 200USDT the moment I notice a strong bearish signal after a higher low.
Q4. Explain How The ZigZag Indicator Is Also Used To Understand Support/Resistance Levels, By Analyzing Its Different Movements (Screenshot Required):
In this question, we shall be looking at how the ZigZag indicator can be used to spot and identify support and resistance levels in a market chart.
Setting resistance and support levels in a crypto chart is a very important aspect of trade. These levels serve as boundaries and retests for stock prices as they fluctuate through the market.
Support and resistance levels are set at areas where prices hover around, thus, serving as boundaries to direct the changes in asset prices.
Support levels serve as retest levels for prices to rebound towards an uptrend direction. While Resistance levels serve as the maximum level where prices rebound towards a downtrend direction.
One of the main advantages of the ZigZag indicator is the possibility of providing multiple areas/levels for support and resistance.
For support levels, the ZigZag indicator helps predict a low price level at which asset prices always remain above, hence, serves as the minimum price level for subsequent fluctuations. They serve as a tool to maintain an uptrend until a price breaks below, indicating a break of trend.
Source
For resistance levels, the ZigZag indicator helps predict a high price level at which asset prices always remain below, hence, serves as the maximum price level for subsequent fluctuations. They serve as a tool to maintain a downtrend until a price breaks above, indicating a break of trend.
Q5. How Can We Determine Different Points Using ZigZag And CCI Indicators In Intraday Trading Strategy? Explain This Based On A Clear Example (Screenshot Required):
As hinted earlier, depending on the type of trade one is involved in, he/she can choose to adjust the default settings of the ZigZag indicator for effective results. We can also combine the ZigZag indicator with other different types of indicators as per our trading options. For most indicators, it is mostly better when we combine with another. This includes ZigZag indicators too.
We can use both the ZigZag and CCI(Commodity Channel Index) indicators on the same chart as illustrated below.
CCI Indicator is some form of a wave-like or oscillating indicator that is used to detect and analyze mainly overbought and oversold periods during a market chart movement. As seen in the image below, the CCI indicator has two major trendline indicators; ie, 100 and -100. An asset is said to be oversold when its price lies below the -100 mark while it is said to be overbought when its price lies above the 100 mark.
Using the ZigZag indicator alongside the CCI indicator in intraday trading is very essential especially since there's the use of a breakout strategy/plan where swing prices are connected/intertwined with one another, thus, making the CCI indicator being able to distinguish between prices above and below the 100 and -100 level marks respectively.
The use of both the ZigZag and CCI Indicators in intraday trading provides a somewhat simple opportunity to identify strong uptrends and downtrends on a market chart. As a result, we're able to identify relevant sell or buy opportunities amidst price fluctuations.
For example, in uptrends, a buy opportunity is presented when the current candle closes at a level above the peak high of the previous candle, with the CCI indicator showing an increase in prices above the 100 level mark. This is illustrated in the image below:
As seen above, the selected candlestick closes above the peak high of the previous candle, thus, indicating a buy entry opportunity. We can then set our stop loss at a level below the previous strong bullish candle.
In downtrends, a sell opportunity is presented when the current candle closes at a level below the peak low of the previous candlestick, with the CCI indicator showing a decrease in prices below the -100 level mark. This is shown in the image below:
From the image above, the chosen candlestick closes below the low of the preceding candle, thus, indicating a sell entry opportunity. We can then set our stop loss at a level above the strong bearish candle.
Q6. Is There A Need To Pair Another Indicator To Make This Indicator Work Better As A Filter And Help Get Rid Of False Signals? Give More Than One Example (Indicator) To Support Your Answer. (Screenshot Required):
Depending on the type of trading strategy a person uses, he/she can always combine two or more different indicators on the same market chart to aid in making profitable and well informed market decisions. It is worth noting that no matter how sensitive it is, almost all indicators require the to be paired with other indicators for effective functioning. That is to say, indicators do not work hundred percent efficiently on their own, hence, require the assistance of one or more other technical analysis indicators to help the trader in making very well productive market transactions. This is same for the ZigZag Indicators as well. In this question, we shall demonstrate the use of the ZigZag indicator along with some other indicators on the same chart and it's implications:
- A. ZigZag Indicator With The RSI Indicator:
Before we move further, one should note that the Relative Strength Index(RSI) indicator is one of such many important tools used by crypto traders in technical analysis. The nature of this indicator makes it very easy to understand assets prices as it moves through the market. It has values ranging from 0 to 100 with some partitions. These values display areas where the prices are in overbought and oversold regions, as well as periods of bullish and bearish trends in the market. It also illustrates bullish and bearish divergence signals within market fluctuations.
It has a marked 30 and 70 point level, such that when the price trend moves above the 70 point mark, it indicates an overbought signal, thus, hinting a possible bearish trend in the near future as price continues to fluctuate.
However, when the price trend moves below the 30 point mark, it indicates an oversold signal, thus, hinting a possible bullish trend in the near future as price continues to alter. This explanation can be seen in the chart below which contains the RSI indicator:
When we launch the RSI together with the ZigZag indicator, it appears as below:
We can see in the image above that the portions of the price line above and below the 70 and 30 point marks correspond with breaks and closure in the price of the asset in the preceding high or low candlesticks.
From the image, we notice that when the asset price closed above the peak high of the preceding candle, it corresponded with an increase in trend line above the 70 point mark in the RSI indicator signalling I can put a buy entry/order.
We also notice that when the asset price closed below the peak low of the preceding candle, it corresponded with a decrease in trend line below the 30 point mark in the RSI indicator, signalling I can put a sell order/entry.
- B. ZigZag Indicator With The Moving Averages Indicator:
The moving averages indicator consists of two different trend lines of different periods. It basically uses the average price ranges of the asset as it moves in the market chart. The two trend lines are the 20 period average line and the 50 period average line. The movement of these wave-like lines helps the trader in predicting adequate buy and sell signals. When launched in a market chart, it appears in such a way that when the 20 period line(Blue) moves across and above the 50 period line (Red), it signals a bullish signal, hence, a buy entry point.
However, when the 50 period line(Red) moves across and above the 20 period line (Blue), it indicates a bearish signal, hence, a sell entry point.
When combined with the ZigZag indicator, it appears as in the image below:
When a breakout occurs, such that there's a close above or below the preceding high or low respectively, we then check for a moving averages cross to confirm either a bullish or bearish signal.
From the image above, we see that when the selected candlestick closed above the peak high of the preceding candle, it was confirmed by a cross between the 20 and 50 average lines, signalling a buy entry point as the 20 period line moved above the 50 period line.
On the other hand, when the selected candlestick closed below the low of the preceding candle, it was confirmed by a cross between the 20 and 50 average lines, signalling a sell entry point as the 50 period line moved above the 20 period line.
Q7. List The Advantages And Disadvantages Of The ZigZag Indicator:
However good or bad a thing is, it always definitely comes with it's pros and cons. The ZigZag indicator is no exception to this.
Advantages Of The ZigZag Indicator:
Some of the major advantages of the ZigZag indicator include:
It is very user-friendly and simple to understand even for new crypto traders
The ZigZag indicator is also helpful in reducing noises or fake signals in market charts
Irrespective of the type of trading strategy, the ZigZag indicator fits perfectly in all types of market timeframes
The ZigZag indicator is also helpful in identifying prominent/significant price trends in a market
The ZigZag indicator is also compatible with a cast range of other indicators to provide efficient trading analysis for crypto traders.
Disadvantages Of The ZigZag Indicator:
Some of the few disadvantages of this technical analysis indicator include:
Since the ZigZag indicator is mainly used for prominent market trends, it tends to be less useful for experienced traders who can easily notice these market trends without the necessary use of indicators
The ZigZag indicator also lacks the ability to predict future market price movements without being paired with other indicators. As a result, most traders may prefer to use more adaptable indicators that offer these features.
B. Disadvantages Of The ZigZag Indicator:
Some of the few disadvantages of this technical analysis indicator include:
Since the ZigZag indicator is mainly used for prominent market trends, it tends to be less useful for experienced traders who can easily notice these market trends without the necessary use of indicators
The ZigZag indicator also lacks the ability to predict future market price movements without being paired with other indicators. As a result, most traders may prefer to use more adaptable indicators that offer these features.
In conclusion, it is noteworthy that the information on the ZigZag indicator as given and discussed in Professor @kouba's lecture were very relevant especially to crypto learner's as myself and others.
In this assignment post, we deliberated on the various aspects concerning the ZigZag indicator, including but not limited to, it's launching, it's use, it's default configurations, the possible indicators that may be used along side the ZigZag indicator, and also the implications of customizing it's key settings.
This is it guys. I send you warm greetings and I'm grateful you found time to read my post. I look forward to coming your way again next week with another exciting write-up. Stay blessed.