The Zig Zag indicator is a technical analysis tool used by traders and investors to identify the trend direction of a security’s price by filtering out minor fluctuations and focusing on significant changes only. It is represented on a chart as a series of straight lines connecting significant lows (support levels) and highs (resistance levels) of price movements.

The indicator adjusts based on percentage changes in price, predetermined by the user, highlighting only those movements that meet or exceed the set threshold. This makes it easier to see the overall direction of the market movement and to identify potential trend reversals, support and resistance levels, and chart patterns.

Although the Zig Zag indicator does not predict future trends, it helps to identify potential support and resistance zones between plotted swing highs and swing lows.

James Chen, investment trader

In Simpler Terms

Think of planning a road trip with the goal of driving from the East Coast to the West Coast of the United States. Instead of focusing on every small town or rest stop along the way, you mark only the major cities and attractions that guide your journey. The Zig Zag indicator works similarly for traders and investors by filtering out the “noise” of minor price fluctuations and showing only the significant moves that could indicate the overall trend of the market.