Zig-Zag

The Zig-Zag indicator will segment the price action into distinct up-moves and down-moves. The direction of each zig-zag is determined according to the amount of price retracement of the closing prices. For example, in an up-move, if the bar closes lower than the previous highest close by “delta” pips or more, then a new down-move is started. Similarly in a down-move, if the bar closes higher than the previous lowest close by “delta” pips or more, then a new up-move is started. Of course, the “delta” value is an input parameter of the indicator.

Unlike most normal zig-zag indicators, this indicator also generates a histogram which can display addition information according to the display mode. The mode can be Volume, Pips or Time. When the mode is Volume, the histogram shows the accumulated tick volume for the current up (or down) move. When the setting is Pips, the histogram shows the maximum price deviation for the current up (or down) move. When the setting is Time, the histogram shows the total time (measured as number of bars) for the for the current up (or down) move.

When the Volume mode is used, this Zig-Zag indicator is basically equivalent to the Weis Wave (invented by David Weis). David Weis trades using Wyckoff principles, and developed the Weis Wave to determine the volume of an up-move or down-move, which can often be more revealing than looking at individual bars.

The zig-zag wave is also useful for detecting chart patterns like price channels, bear/bull flags etc, which are sometimes easier to see when looking at the “clean” zig-zag wave compared to a mass of candles.

An important aspect of the zig-zag is that it is essentially zero-lag with respect to the price action, i.e. the turning points of the zig-zag exactly line up with the related price action. This makes it potentially useful for spotting divergences, for example the price zig-zag made a higher high but the histogram made a lower high.

The value of the “delta” used for the zig-zag direction change is important, and should be tuned according to the instrument and time-frame. If the value is too high, then the zig-zags will be too few and any nuance in the histogram will be lost. If the value is too low, then the zig-zags will be too many and it will contain a lot of noise. David Weis does not provide any rules for determining the value to use, instead he has used experimentation and his experience to determine the best values to use for the instruments that he trades.

A more mechanical method to determine an appropriate value of the “delta” is a subject of current study, please check my blog for details.

The indicator allows a variety of display and colouring options, including the addition of labels above/below the zig-zag wave.

Input Parameters



Screenshots


Zig-zag showing Volume (equivalent to Weis Wave)

3 separate Zig-zags showing Volume, Pips and Time

Zig-zag with "Invert down move" enabled

Zig-zag with bulk approximation of buy/sell volume and delta

Further Information

Further information may be found on this blog by searching for tagged articles.


Availability

The indicators are available to purchase for MarketScope 2.0 via the Store page. You can also request a trial version by contacting me (use the link in the side bar).