Crypto Trading Using Zig Zag Indicator - Steemit Crypto Academy |S6W1| - Homework Post for professor @kouba01 -by @sherazsultan
Hello everyone. Welcome back to my post as i have wrote the homework for professor @kouba01. The professor has delivered a lecture on "Trading using zigzag Indicator." This is my homework post.
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Question 1: Show your understanding of the Zig Zag as a trading indicator and how it is calculated?
The crypto market is highly versatile where the price of the coins are not stables and keep changing time to time. The traders keep doing the trading and their buying and selling pressure effect the movement of the market. The market behave according to the moves of the traders in the market. So the traders first analyze the market before taking the trading decision. There are multiple tools and strategies and the indicators are use to analyze the market to predict the future of the market.
- Market Trend
Multiple factors are keep into consideration while analyzing the market. The trend identification is the most important thing to consider before taking any trading decision. The traders should identify the trend first before entering into the market. The trend identification will help the trader to identify which direction market is moving.
This will help to identify whether to buy the coin or it is best selling spot. The traders who do not follow the trend usually remain in lose. They usually end their trading in lose. So instead of going counter, we should identify and follow the trend. There are a lot of the methods in the
crypto market to identify the trend.
We can use multiple technical indicators to identify whether it is the bullish trend or bearish trend. We can use the market structure, chart, etc. The market can be in uptrend, downtrend or side way moves.
- Zig Zag Indicator
The Zig Zag Indicator is the trend based indicator which is use world wide to identify the market trend. The traders use this to identify the market trend and then take the trading decisions accordingly.
This indicator has been introduced to identify the current and past market trend. This indicator has the zig zag nature. Just like the head and shoulder, this Zig zag indicator also show some higher high, high low, lower low and lower high moves swing. These HH, HL, LH, LL are connected with the zig zag lines and identify the market trend.
The lines of this indicator are not straight but move above and down while following the price movement on the chart. The lines connect the maximum and minimum price point on the chart together and thus a zig zag is formed which help the traders to identify the market trend at given time period. It also help to identify the trend reversal. When the indicator form the double bottom or double top, it indicate the trend reversal.
This indicator is formed between the high and low points of price and cannot be use to predict the future trend. But this just produce signals to identify where the market s moving currently. This does not even give us signals about how strengthen then market is or how volatility is there in price. But just identify the present and past trends.
This indicator first plot the points at the high and low price points on the chart. Then the lines are drawn by connecting these points. The zig zag structure is formed because of the price movement between the high and low swing. This indicator also help to identify the resistance and the support level. The high of the line is the support level and the price is bounce back after breaking the resistance level. The low point of the line is the support level/
How it is calculated
This is a technical indicator which use the price historical data to predict the future trend. While calculating the Zig Zag indicator, the trader need to consider multiple factors and parameters. But the calculation depend upon the type and nature of the chart on which the indicator is applied.
Different indicator use the different price value for their calculation. The Zig zag indicator use the price history , as the last point keep changing constantly, so we will exclude it while calculating.
There are a few points which we need to keep into consideration. Below i have mentioned those points.
- There must be a starting point. It can be a high swing or low swing.
- All the HH, HL, LL or LH swing should be identified.
- The price movement percentage should be calculated.
- Then we should draw a trendline starting from the origin point and should connect all the HH, HL, LL and LH points.
- In case of the uptrend, each higher high should be greater than previous higher high.
- In downtrend, each lower low should be lower than previous low.
When we apply the Zig Zag indicator on chart, two points are most important to keep into consideration. These are the depth and deviation. It has been calculated by selecting a start point and percentage of the price. The indicator can be calculated using the below formula.
- Zig Zag = (High-low price series , %change = X, retrace = FALSE, Last Extreme = TRUE)
If percentage change is greater than the X plot Zig Zag
- HL = High-Low price series
- percentage change = Minimum percentage price movement
- Last Extreme = Variable change
Question 2: What are the main parameters of the Zig Zag indicator and How to configure them, and is it advisable to change its default settings? (Screenshot required)
There are two main parameter of the zig zag indicator which is Deviation and the depth. These two points are very important and they must be configured in order to make the zig zag work more efficiently.
The Depth parameter is the minimum number which is require to form a trend line, either high or low. This parameter determines how many periods the zigzag indicator will take to draw a swing. It can be high swing or low swing. The number of the period to plot the high swing or low swing is determine by the Depth parameter. The Zig Zag indicator default setting for the depth is 10. One can change it too.
The Deviation parameter specifies the minimum percentage of th price movement before the trend reversal. This is the minimum % from the last swing which was formed before identification of a new swing. The default deviation setting is 5.
Zig Zag Configuration
For configuration of the Zig Zag indicator, we can use the tradingview.com platform. After visiting the tradingview.com, select the pair of the coin of your own choice. Then a chart will shown to you. Click on the Indicator icon and search for the zig zag indicator from the search bar. Then click on it. The zig zag will be applied on your chart.
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Now the indicator has been added on your chart. For configuration, click on the setting icon. The default setting of the two main parameter of the zig zag indicator which are the depth and deviation is 10 and 5 respectively.
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Now the zig zag indicator has been configured. It has been added on your chart.
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But if we change the length of deviation and the depth, it effect on the zig zag appearance on the chart. Let suppose we change the default setting of depth from 10 to 30.
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Let suppose we change the deviation from the default setting 5 to 20.
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This higher deviation setting is best for those traders who have planned to trade for long term. The short term should consider the default setting because it is best for them. But they can even change it is the default setting is not suitable for their trading plans and trading strategy. When we change the setting of the parameter, either the indicator become so sensitive or so insensitive.
CHANGING OF SETTINGS
The traders can change the indicator setting if is not suitable for their trading strategy. They can change according to their need and requirement. But the traders should not change the default setting of the indicator is it suit on their trading strategy.
But one should be very careful before changing the setting because setting the depth and deviation wrong, this effect the chart huge and you may not will be able to identify the correct trend for your trading. If we will set the depth so high, it may remove some important and useful information. If we set it too low, there will be so room for more breaks.
Similarly while setting the deviation, we should be very careful. The indicator does not rely on time. So If you are short term traders, just shift the time frame to lower level. If you want to predict the trend for long term trading, then shift time frame to upper level like 4h,etc. And if you want to predict market for longer period of time, they the fundamental analysis is more best.
Question 3: Based on the use of the Zig Zag indicator, how can one predict whether the trend will be bullish or bearish and determinate the buy/sell points (screenshot required)
Zig Zag indicator is the trend based indicator which help to identify the market trend. The points on the high and low swings are plotted. Then a line is drawn to connect these points. This line is shape in zig zag form. This zig zag market structure can be use to identify the market trend.
- Bullish or Uptrend
When the line drawn by connecting the swing points form higher high and high lows and keep moving from down to top, the market is said to be in the bullish trend.
In the uptrend market, the traders get the best entry spot. When a new high low is form which is higher than the previous high, the traders should enter into the market. In this case, the stop lose is set below the low and take profit at the resistance level.
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In the above chart, the market was identified in bullish trend because the diagonal line is drawn connecting the high and low swing and keep making the higher high and high low. The line is moving from down to top while creating the higher high and higher low. Each high is higher than previous high. Thus market is in the uptrend.
- Bearish/Downtrend
When the line drawn by connecting the swing points form lower low and lower high and keep moving from top to down, the market is said to be in the bearish trend.
In the downtrend market, the traders get the best sell spot. When a new low high which is higher than previous lower high. The stop lose is set above the high and take profit is set at support level.
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In the above chart, the market was identified in bearish trend because the diagonal line is drawn connecting the high and low swing and keep making the lower high and lower low. The line is moving from top to down while creating the lower high and lower low. Each high is lower is lower than previous low. Thus market is in the downtrend.
- Identifying Buy and Sell Points Using the Zigzag Indicator
The Zig Zag indicator is very useful indicator which use much by the traders to identify the market trend. It also identify the best entry and exit spot. The historical price data is being use in the zig zag indicator to identify where the market is trending and which are the best spot to enter into the market or exit from the market.
This indicator is highly useful because the small price movements are ignored thus the noise get reduce to great level. This indicator do not consider the small fluctuation in price. SO the filter the noise and very clear view is given which help the traders to identify the trend easily.
As the noise is remove, and small fluctuations are being ignored, so the trend identified by the zig zag indicator is the strong trend. One can find the best entry and exit spot using which will be useful to earn high profit and save from the risk of lose.
The Buy spot can be identified when the indicator indicate that the market is in uptrend. When the trend is bullish, market move from the down to top while creating some higher high and high low. We can identify the best entry spot using the Zig Zag indicator when the market move while creating higher high and high low.
Then market is in uptrend. When a new higher high is created which is higher than previous high, the buy opportunity is given and traders can enter into the market to earn profit. The stop lose is set below low swing and take profit at resistance level.
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The Sell spot can be identified when the indicator indicate that the market is in downtrend. When the trend is bearish, market move from the top to down while creating some lower low and lower high. We can identify the best exit spot using the Zig Zag indicator when the market move downward while creating lower low and lower high.
Then market is said to be in downtrend. When a new lower high is created which is higher than previous low high, the sell opportunity is given and traders can exit from the market to earn profit and save from lose. The stop lose is set above high swing and take profit at support level.
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Question 4: Explain how the Zig Zag indicator is used to understand support/resistance levels, by analyzing its different movements.(screenshot required)
- Support level
The support is an area where the price stop decreasing up further, the selling pressure expected to pause and price is expected to bounce back. At this level, the selling pressure get exhausted and the buyers enter into the market and stop price decreasing more, a lot of pending buying orders get executed because of which, price start moving in upward direction and trend get reverse. This is the level where the selling pressure pause, the buying pressure increase which prevent the price to move further in downward direction.
- Resistance Level
The resistance level is an area where the price stop increasing up further, the buying pressure expected to pause and price is expected to bounce back. At this level, the sellers enter into the market and stop price increasing more, a lot of pending selling orders get executed because of which, price start moving in opposite direction and trend get reverse. This is the level where the buying pressure pause, the selling pressure increase which prevent the price to move further in upward direction.
- How Zig Zag Identify the Resistance and Support Level
The Support and resistance are highly important price level. At resistance level, The price bounce back to downward and at support level, price bounce back to upward. These levels create best selling and buying opportunities for traders. We can identified both using the Zig Zag indicator.
- Support Level
If the indicator have multiple low swing at the same level, this is the support level. The price at the support level push upward but after a small high, it again come to the same support level. At the support level, the price make the multiple low swings at the same level.
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- Resistance Level
If the indicator have multiple high swing at the same level, this is the resistance level. The price at the resistance level push downward but after a small low, it again come to the same resistance level. AT the resistance level, the price make the multiple high swings at the same level .
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Question 5: How can we determine different points using Zig Zag and CCI indicators in Intraday Trading Strategy? Explain this based on a clear example. (Screenshot required)
- Pairing Zigzag and CCI Indicators In an Intra-day Trading Strategy
The Zig Zag indicator is good and give the signals to identify the market trend. But using it alone is not advisable. When we combine it with some other suitable indicator, the accuracy of the result get enhanced and the traders get more authentic output.
The Commodity Channel Index is an indicator which is use to predict the traders mindset in the crypto market. The difference between the current market price and historical price of the asset is use in the CCI and it oscillate between 100 to -100 points. In this case, the 0 is consider as a middle point.
When the line is above the mid point, it mean that the current market price is above than the historical average price and the market is trending upward. It indicate that there is bullish trend in market and price is rising.
But when the line is below the mid point, it mean that the current market price is below than the historical average price and the market is trending downward. It indicate that there is bearish trend in market and price is declining.
When the market is at 100 point, it indicate a strong uptrend. This mean that the investors are in profit. It is perfect selling spot. The price is high, the traders can earn high reward by selling their coins. When the line is at -100, it mean that there is strong downtrend. This is best buying spot, the traders can buy the coin at low price.
When we combine the CCI with zig zag, the accuracy of result get enhanced. The traders get more authentic results. The Zig zag indicator produce the signals to identify the trend which are confirmed by the CCI indicator. Thus the traders get more appropriate selling and buying spots.
For the buy signals, the zig zag should break the high swing which is higher than previous high/resistance level and CCI should also cross the 100 points. When the zig zag break the new high which is higher than previous high, it produce the buy signal. And when the CCI cross the 100 points, it mean that there is strong bullish trend. This is best buying spot. The stop lose is set below low swing and take profit at resistance level.
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A sell signal is produce when the zig zag break the low swing which is lower than previous low and move below and the CCI cross the -100 points. When the zig zag break the support level moving down and the CCI move below the 0, the sell signals are produced. The stop lose is set above high swing and take profit at support level.
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Question 6: Is there a need to pair another indicator to make this indicator work better as a filter and help get rid of false signals? Give more than one example (indicator) to support your answer. (screenshot required)
Crypto market is highly volatile. The price keep changing every second, minute. This is because the change in buying and selling pressure. When the buying pressure increase than selling pressure, market move upward. When the selling pressure get increase than the buying pressure, market move downward.
So the traders should be very careful about the market trend and market structure before making an entry. The Zig zag indicator help to identify the market trend but no indicator is 100% accurate. The zig zag also can produce the wrong results sometime because of which, the traders may get mislead and may make wrong trading decisions.
That why, it is recommended to use the Zig Zag indicator with other indicators. We should combine the zig zag with other suitable indicator. It will enhance he accuracy and authenticity of the results.
There are a lot of indicator which we can combine with the Zig Zag indicator, but here, i will explain the RSI and Parabolic SAR.
- Parabolic SAR
The parabolic SAR is well known and popular indicator which is being use in the crypto world for identification of the trend. This indicator is use when the market move in particular direction. In trending market, the parabolic SAR work well to identify the market direction. It also beneficial to identify the trend reversal points.
Moreover, this indicator also helpful to get the best entry and exit spots. These spots can be use to decide what should do next in the market.
This indicator is represented in form of the dots which move with the movement of price. These dots move above the price level on the chart which indicate that there is downtrend in the market. When the dots move above the price on the chart, it indicate that there is the uptrend and price is rising up.
When there is pause in the dot series, it indicate the trend reversal. When the dot direction change, it indicate that the trend will be change now in the market.
When we combine the Parabolic SAR with the Zig zag indicator, the accuracy of result get increase. the produce result are more accurate and the traders can then buy and sell the coin with more confidence.
Buy Scenario
We can place the buy order when the Zig zag indicator break the high swing which is higher than previous high while moving upward and the price move above the parabolic SAR. This produced the best buying opportunity and traders can enter into the market with high confidence.
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Sell Scenario
We can place the sell order when the Zig zag indicator make the low high which is lower than previous low high and price move below the parabolic SAR. This produced the best selling opportunity and traders can exit from the market while making profit.
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- RSI
The RSI is very popular and useful indicator which is use in the market to get to know about the market conditions like whether the market is in overbought zone, oversold zone, trend reversal, etc.
This indicator has 100 levels within which, it oscillate. When the RSI move below the 30 level, it indicate that the market is in oversold zone and selling pressure is high. The market price is decreasing and is in bearish trend. At this point, the bullish trend is expected. When the RSI move above the 70 level, it indicate that the market is in overbought zone and buying pressure is high. The market price is increasing and is in bullish trend. At this point, the bearish trend is expected.
When we combine the RSI with the Zig zag indicator, the accuracy of result get increase. the produce result are more accurate and the traders can then buy and sell the coin with more confidence.
We can place the buy order when the Zig zag indicator break the high swing which is higher than previous high while moving upward and the RSI is below the mid point or 50 bands. This produced the best buying opportunity and traders can enter into the market with high confidence.
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Sell Scenario
We can place the sell order when the Zig zag indicator make the low high which is lower than previous low high and RSI is above the mid point or 50 bands.. This produced the best selling opportunity and traders can exit from the market while making profit.
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Advantages
- The Zig zag indicator identify the market trend
- This is simple and easy to understand
- This also identify the support and resistance level. Thus we can get good buying and selling spots.
- When we combine it with other indicators, it accuracy get enhanced.
Advantages
- The Zig zag also not 100% accurate like any other indicator, So it sometime produce false signals which may mislead traders and they may make wrong trading signals.
- When we use the Zig zag indicator alone, it does not effective and efficient for short time period. So we have to use it combining with other indicator for more authentic results.
- Cannot predict the market future.
he Zig Zag Indicator is the trend based indicator which is use world wide to identify the market trend. This help to identify market trend, support and resistance level. When we combine it with other indicators, its accuracy get increase.
I have combined it with RSI and parabolic SAR and have shown the selling and buying scenarios. The default setting is more recommended for the traders. But if it does not suit on the traders trading strategy, they can change it. I am thankful to professor @kouba01 for this lecture.
You need to do more voting. At least 10 votes each day.
I will do the same henceforth.