Stocks & Commodities V. 33:05 (12–21): Filtering Price Movement by Giorgos E. Siligardos, Ph.D.

Filtering Price Movement by Giorgos E. Siligardos, Ph.D.

For Your Digital Eyes Only

Here is an alternative to the classic zigzag indicator, which may prove useful to visual technical analysts and chart pattern researchers.

When there is need for algorithmic identification of price swings in a chart, there is a word that always comes to mind for technical analysts: zigzag. The zigzag indicator is based on the concept from Arthur Merill’s 1977 book Filtered Waves, Basic Theory: A Tool For Stock Market Analysis. It filters price movements below a cutoff level, that is, a threshold. The threshold is either in point terms or in percentage terms. If you were, for example, using a threshold of x points, the zigzag would disregard all price movements less than x points. If, on the other hand, you used a threshold of x percent, the zigzag would disregard all price movements of magnitude less than x percent. When plotted, the zigzag is shown as a crooked line connecting peaks and troughs. The line segments of the zigzag are commonly referred to as its legs.

Notwithstanding that the zigzag identifies prominent peaks and troughs, it doesn’t filter the price swings the same way a technician’s eye would. In this article, I will introduce you to a more natural way of filtering the price, which is accomplished via what are called perceptually important points. This alternative to the classic zigzag indicator is closer to the way a human perceives the movement of price...