Crypto Trading Using Zig Zag Indicator - Steemit Crypto Academy - S6W1 - Homework post for @kouba01

Hi guys,
It's the first week of season number 6 and I am so delighted to be among those writing in the academy for these season. Today, after reading through the lecture delivered by professor @kouba01, on the topic titled Crypto Trading Using Zig Zag Indicator, I will be attempting the homework task given by the professor to show my understanding about the course. Let's get started.

Every trader in the crypto world tends to look out for the direction of the trend for him/her to make a better trading decision. So identifying trend in any crypto currency pair is very important as it helps trader to trade with the trend and not against the trend (counter trade). One of the indicators use by many traders to see the trend in the market is the Zig Zag indicator.

The Zig Zag indicator as the name implies is a type of indicator that is zigzag in nature, that is the line for this indicator is not straight as it follows major price action to move up and down. The indicator is use to connect the maximum and the minimum points on a chart together.

Just like I said in the paragraph above, the indicator is only interested in major trend movement on a chart and because of that, all minor movement or price fluactuation is always ignored by the indicator. This is because the indicator helps to eliminate fake out that may display it self at the cause of the movement. The zig zag indicator waits and confirms this movement before it goes.

The Zig Zag indicator has help in identification of the 5 points that are usually a problem to locate in the Elliott Wave. The Elliott wave theory as we can remember is made up of the impulsive waves and the corrective waves and these points identification is some how difficult for a lay trader, but using the zigzag indicator makes it's identification more easier and simpler.

To calculate the Zig Zag indicator, the previous parameters must be taken in to consideration and also the type of chart it is applied also plays a very important role when it comes to calculating it. So in the case of line chart for instance, only the closing price is taken in to consideration whereas in the case of bar chart or candlestick chart, the minimum and maximum price are taken into consideration.

The deviation in the indicator is what determines the line drawn on the chart as it gives the percentage of the price fluactuation. So therefore, the last deviation in the chart is always ignore since it is still worked on. The previous deviation is what is use for calculation.

The screenshot below shows zigzag indicator on my chart. This indicator was added first to the chart to give me access to configure it. The chart is gotten from tradingview website.

From the settings option as you can see in the chart above, we have two main parameter I.e deviation (%) and the depth. By default, the deviation parameter is usually 5 and the depth parameter is usually 10.

Just like I have stated above, in configuring your indicator, you can easily change the default settings of both they deviation and depth to any value that suits your trading strategy. As an example, I will be changing the values of my deviation and depth to 2 and 5 respectively and then see how the chart is going to look like. Let's see the image below.

From the screenshot above, we can notice that there are lots of cluster in the chart and it may not be very easy to trade using this as the volitility has become very high. In my opinion, changing of the default setting should be done only by traders who are very familiar with the strategy and must be a pro when it comes to trading and not by newbies in the crypto world. So I recommend that the default setting be used by all unless you are a pro you are not advice to make any form of changes.

The zig zag indicator is a trend based indicator hence to determine a trend using this indicator is very simple and easy. In the case of bullish trend, we see series of of peak which are higher than the previous high and the low is higher than the previous low. This movement confirms the presence of an uptrend or bullish trend in the market structure. An example of this can be seen in the image below.

Similarly, in the case of bearish trend, the movement here is downward and inverse to the movement of the uptrend. Here the new low is lower than the previous low and the new high is lower than the previous high. This movement confirms the presence of a downtrend or bearish trend in the market structure. An example of this can be seen in the image below.

It is always recommended that a trader knows the trend direction before making an order just like I have said early. A trader who does not know the direction of a trend to perform a counter trade I.e trade against the trend which is a very dangerous type of trading. For buy order, it is always recommended that traders place this order when the market is moving in bullish or uptrend direction. In the same, for sell order, it is recommended that traders place this order when the market is moving in bearish or downward direction.

In the case of buy point, it should be place when the market is in uptrend. Here a buy order can be place above the point where the present low is higher then the previous low and then stop loss is place just below the entry point which happens to be the newly formed low. The screenshot above explains it more clearly.

From the screenshot above, an entry is made right after the low which is higher than the previous low and the stop loss was place right below the entry point which is a support level to the trade.

In the case of sell point, it should be place when the market is in downtrend. Here a sell order can be place at the point where the present high is lower then the previous high and then stop loss is place just above the entry point which happens to be the previous high. The screenshot above explains it more clearly.

From the screenshot above, an entry is made right after the high when the market is moving in downward direction. And stop loss is taken above the entry point which happens to be resistance point.

Just like every other indicator, the Zig Zag indicator can also be use to spot the points of support and resistance. It is important to mention here that points of support and resistance are points that the price of the asset will reach and then bounce back I.e the price does not cross this points as the price is forced to reverse to the opposite direction at this points. Let's consider the screenshot below.

From the screenshot above, you can see the points mark as support and resistance level as indicated in the chart, these are level where the price can no long move downward or upward as the case may be. The zig zag indicator shows how the price at this points bounces and then reverse because it can't move any further. In essence the level of support are sometimes levels of accumulation and then the level of resistance are point where the distribution takes place. Support level pushes the price in an upward direction I.e the zig zag indicator at this point goes upward and resistance level pushes the price in a downward direction.

The combination of Zig Zag indicator and the CCI indicator is to be certain about the trend movement and then make an entry. Basically, the combination is done to confirm the trend and the point we wish to enter. The CCI indicator is use to spot overbought as well as oversold in the crypto market. When the indicator is seen in a range above 100 we say the asset is in it's overbought region in the same way, when the indicator is in the range of -100, we say the asset is in it's oversold region.

Using the zig zag and CCI indicator for intraday trading, in the case of buy entry confirmation, the price must break above the previous resistance level and then move upward and the CCI indicator must be above 100 to confirm that we are in a strong trend. The stoploss should always be placed below the previous resistance level to avoid too much loss in case the trade does not go as planned.

From the image above, the CCI indicator is seen above 100 which is a confirmation that the trend is a strong trend and the zig zag indicator has shown the price breaking and moving above the previous resistance.

Using the zig zag and CCI indicator for intraday trading, in the case of sell entry confirmation, the price must break above the previous support level and then move downward and the CCI indicator must be -100 or below to confirm that we are in a strong trend. The stoploss should always be placed above the previous support level to avoid too much loss in case the trade does not go as planned.

From the image above, the CCI indicator is seen within -100 which is a confirmation that the trend is a strong trend and the zig zag indicator has shown the price breaking and moving below the previous support.

The need to pair indicators to make this indicator work better as a filter and help get rid of false signals can never be overemphasised. As we all know, no indicator is 100% efficient and hence any trader who wishes to obtain a more reliable solution has to do well by combining more than one indicator on the chart. Here is this question I will be combining the Zig zag indicator along side the RSI and the ADX indicator to confirm my trend movement. Let's get started.

The RSI indicator is an indicator that helps trader to know when the asset is in it's overbought or oversold region. When the RSI values is below 30 we say that the asset is in it's oversold region. In the same way, when the RSI is above 70 we say the asset is in it's overbought region. So to be certain of the trend, when a buy signal is to be placed, the zig zag indicator must be in an uptrend and the RSI indicator seen above the 50 RSI as a strong trend indication. See screenshot below.

From the screenshot above, we can see that the price of the asset breaks above the previous resistance and the zig zag indicator moves in upward direction, the RSI indicator on the other hand is above 50 which signifies a very strong trend. The stoploss was placed at the support level before the entry. The same thing is applied when it comes to sell entry but just in a reverse case.

The ADX indicator is another indicator that gives a better result when combine with the Zig zag indicator. The indicator talks about how strong the trend of the market is at any point in time. When ever the ADX indicator has a reading greater than 25, it implies that the trend a strong uptrend. So just like the previous, when the price breaks the previous resistance and then moves in upward direction as indicated by the zig zag indicator, and the ADX value is above 25 then it means that a buy entry to entered at that point because it is a strong position. See the screenshot below.

From the screenshot above, we can see that the price of the asset breaks above the previous resistance and the zig zag indicator moves in upward direction, the ADX indicator on the other hand is above 25 which signifies a very strong trend. The stoploss was placed at the support level before the entry. The same thing is applied when it comes to sell entry but just in a reverse case.

They Zig Zag indicator just like every other indicator has it's own advantages as well as disadvantages. Here in this section, I will be listing the advantages and the disadvantages of this indicator in a tabular form below.

The zig zag indicator is indeed a very important tool for every trader. It is important because by mere looking at the chart in which this indicator is added you will be able to say the trend direction of the market. Though a lot of weakness has been notice in the indicator as well and that is the reason it is advisable not to use the indicator as a stand alone tool, always combine it along side other indicator for better results.

Finally, I want to sincerely appreciate the professor in the person of @kouba01 for such an insightful and educative lecture, I have really learnt a lot at the cause of carrying out this assignment task. I look forward to learning more from you sir as the Academy progresses.