Many professional traders use the zigzag indicator in order to find out the retracement of a trend and exact entry and exit point. There are thousands of indicator in the forex market but zig zag is widely due to its high-reliability trading signal. Though it’s a lagging indicator but it can be fantastic with some combination tools and support and resistance.
USDCAD, buy setup using zigzag trading strategy
Figure: A perfect buy entry using zigzag indicator, stochastics and trend line
The zigzag indicator helps us to identify the retracement level and wave completion of a currency pair. This strategy will work best only with trending currency pair. So our first step is to make sure that there is the prevailing trend in the market. In the above figure, the point a, b, c and d are easily noted by using the zigzag indicator. The zigzag indicator forms a red straight line which helps us to identify the new high and new lower low. A perfect example of uptrend!
The second step is to draw a valid trend line using at least 3 points. The best thing about this zigzag trading strategy is that we can start riding the trade from the third point of the trend line. At the point E, we can see that the stochastics is also in the oversold region. So, the trader will take the buy entry at the point E using proper money management strategy.
Setting the stop loss and take profit in the zigzag trading strategy is a bit more complex compared to trade entry. For buy entry, we can put our stop loss just below the previous higher low. Take profit should be determined by analyzing the momentum of the market and resistance zone for maximizing the profit.