Binary options trading requires a clear analysis of price movements and identification of key points for buying a particular contract. It is extremely important to distinguish true movements from false ones.
One of the popular tools for identifying the current trend and its reversals is the Zig Zag indicator. It helps traders track significant historical changes in prices, predicting their continuation, and at the same time filtering out market “noise”.
This article will cover the main ways to use this indicator, and you can find it directly in the list of standard indicators in the Pocket Option platform.
What is Zig Zag and how to set it up?
Zig Zag is a trend indicator that helps highlight major trends and reversals, excluding minor price fluctuations. On the chart it displays segments that connect key extremes, which allows you to see the overall trend of the market more clearly.
The main goal of the indicator is to remove minor price fluctuations, leaving only significant price movements. Thanks to this, traders can more effectively identify long-term trends and their technical levels.
To use the Zig Zag indicator effectively, you need to set up the following parameter:
- Percentage Deviation: It is the minimum percentage of price change considered significant for the indicator. It is recommended to set between 5% and 10%, depending on market volatility and the asset selected.
- Depth: It is minimum number of candles for the indicator to consider when determining appearing extremes (highs or lows). The higher the depth value, the less often Zig Zag will change its lines, excluding smaller fluctuations.
- Backstep: It is the minimum number of candles between extremes. Backstep helps filter out misleading frequent changes in the direction of the Zig Zag line.
You can customize the settings for specific trading conditions and assets. For example, for highly volatile markets, it is advisable to increase the percentage deviation to filter out small price fluctuations.
How to trade with Zig Zag Indicator?
The tool can be useful in binary options trading due to its ability to simplify the analysis of trends and reversals. Let’s discuss some ways to use it:
- It help to define a trend
Zig Zag helps to clearly see trends on the chart. When the Zig Zag line points to a series of higher peaks, it indicates an uptrend. In this case, traders should look for opportunities to buy call options (CALL).
If the Zig Zag line forms a sequence of lower peaks, it indicates a downtrend, which may be a signal to buy put options (PUT).
- It helps to foresee reversals
Zig Zag helps to identify potential trend reversals. When the indicator changes direction, forming a new high or low, it may indicate the beginning of a new move. If after an uptrend, Zig Zag starts forming lower peaks, it may signal the beginning of a downtrend, and vice versa.
Overall, the main advantage of the Zig Zag advisor is that it simplifies the analysis of market data by filtering minor price fluctuations and highlighting important movements. However, a trader should remember that the Zig-Zag indicator does not predict future movements: it only helps to work with historical data. Therefore, for maximum efficiency, it should be used in combination with other indicators.