The Zigzag Trend Indicator by Spyros Raftopoulos
Zigzag is a powerful noise filter, but it’s not without its problems. Here’s a technique that incorporates the power of zigzag into a more valid and tradable indicator.
The popularity and usefulness of the zigzag
indicator can be ascribed to three important
characteristics. It is an effective noise filter;
it graphically presents the main trend with
great clarity; and it is still a very low-level
indicator, in that its final interpretation of price is not filtered through one or more algorithms, but is
based upon the price itself.
While these are important advantages, zigzag’s main disadvantage
is its dynamic nature. The indication of a trend’s
direction (provided by the “last leg” of zigzag) is revisable, and can therefore be misleading. Further, the indicator cannot
be used in mechanical systems, since the backtesting of such
systems should exclude any revisable parameters in order to
be valid and accurate. I described the problem of the dynamic
last leg in my previous S&C article, “Zigzag Validity.” That
article also presented my zigzag validity indicator, which can
be used to validate the last leg.
This article introduces the zigzag trend indicator, which
handles the dynamic nature of the zigzag indicator more
efficiently. The zigzag trend approach solves the validity
problem of the dynamic last leg by incorporating zigzag into
a clearly tradable indicator.