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ZIG ZAG
Overview
The Zig Zag indicator filters out changes in an underlying plot (e.g., a security's price
or another indicator) that are less than a specified amount. The Zig Zag indicator only
shows significant changes.
Interpretation
The Zig Zag indicator is used primarily to help you see changes by punctuating the most
significant reversals.
It is very important to understand that the last "leg" displayed in a Zig Zag chart can
change based on changes in the underlying plot (e.g., prices). This is the only indicator
in this book where a change in the security's price can change a previous value of the
indicator. Since the Zig Zag indicator can adjust its values based on subsequent changes
in the underlying plot, it has perfect hindsight into what prices have done. Please don't
try to create a trading system based on the Zig Zag indicator--its hindsight is much better
than its foresight!
In addition to identifying significant prices reversals, the Zig Zag indicator is also
useful when doing Elliot Wave counts.
For additional information on the Zig Zag indicator, refer to
Filtered Waves by Arthur Merrill.
Example
The following chart shows the 8% Zig Zag indicator
plotted on top of Mattel's bar chart.
This Zig Zag indicator ignores changes in prices
that are less than 8%.
Calculation
The Zig Zag indicator is calculated by placing imaginary points on the chart when prices
reverse by at least the specified amount. Straight lines are then drawn to connect these
imaginary points.
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