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Use the Zig-Zag to filter out market noise, and get a clearer view of market direction. Rather, it simply makes your analysis easier. It can quickly show noteworthy corrections, as well as make Elliott Wave counting and finding Fibonacci Retracement and Extension points easier.
The Zig-Zag takes all the noise of the market and provides straight lines to connect high points and low points. This makes the Zig-Zag choppier, as shown in Figure 2. While daily charts are used for the examples above, the Zig-Zag can be applied to any time frame.
Anyone who has used Elliott Wave knows that when you are starting out, getting rid of some of the noise can help. The Zig-Zag shows only the strong moves, and thus highlights impulse waves and corrections. Elliott Wave analysis is beyond the scope of this article. A variation of the Zig-Zag, called the Zig-Zag Retrace, shows retracement and extension levels, relative to prior waves.
This is similar to the Fibonacci Retracement and Extension indicators. Some of the waves have been labeled, so you can see how to read the numbers provided by the Zig-Zag Retrace. Notice how if you would have been watching for Fibonacci levels, a number of these extensions and retracements reversed near the Fibonacci percentages listed above. Fibonacci numbers provide areas to watch, not exact entry signals.
Therefore, this indicator would have be useful for automatically showing how far the market had extended or retraced, so you could then make your trading decisions and act on your signals. Rather they are analysis tools which filter out market noise, can be used on all time frames, aid in Elliott Wave Counting and can provide retracement and extension levels. The retracement and extension levels are useful when combined with traditional Fibonacci levels. Aiding Elliott Wave Counts Anyone who has used Elliott Wave knows that when you are starting out, getting rid of some of the noise can help.
Fibonacci Retracements and Extensions A variation of the Zig-Zag, called the Zig-Zag Retrace, shows retracement and extension levels, relative to prior waves. Common Fibonacci Retracements levels are: Common Fibonacci Extension levels are: Therefore, you can watch for these numbers to show up on the Zig-Zag Retrace.