What is a Zig Zag Indicator?

Zig zag indicators are factors that are used to predict when a particular security will reverse its momentum. This type of indicator can be used to project when a stock offering will level off and begin to drop in value, or when a security currently undergoing a downward trend will bottom out and begin to regain some of its lost value. Some investors find the utilization of the zig zag indicator approach to be highly effective, while others believe that indicators of this type have limited merit and should not be used as the only basis for making an investment.

A true zig zag indicator often relies on the use of historical data to identify past trends, as well as when those trends went through some sort of reversal. The idea is to establish a known pattern for the performance of the security, thus providing some insight into any consistent upward and downward movement that is relevant. For example, an analyst may assess historical data and determine that a given security tends to decrease in value during the first quarter of each year for the last several years. During this same time period, the security bounces back during the second quarter. Based on the tracked movements, the investor may determine that purchasing shares just before the end of the first quarter and holding them at least through the second quarter is highly likely to generate a return on the investment.

While historical data is very important to the use of a zig zag indicator, many analysts also compare general market conditions with those identified trends. Assuming that the state of the economy during those trends is much like the current state, an investor may have reason to think that the past pattern is about to repeat once more. In order to benefit from the projected events, the investor will arrange purchases and sales that are in line with the anticipated movement. If the trend does come to pass, he or she stands to either earn a profit, or at least prevent a loss.

For advocates of the zig zag indicator approach, the methodology appears sound, and is considered a reliable means of projecting future movements in the marketplace. Detractors, while agreeing that a zig zag indicator does yield some valuable information, say that it can only tell part of the story. With this in mind, some analysts recommend that indicators of this type be used in conjunction with other indicators that address such issues as changes in consumer demand, the outcome of political elections, the potential for natural disasters, and any other factor that could impact the performance of the marketplace in general.