The ZigZag is not really an indicator at all, but rather a filter that displays the most relevant price movement by eliminating the smaller price movements. The sensitivity of price movements are set in percentage terms and can be set to either the open, close, high or low.
A ZigZag indicator set at 10% with would show a line which will only reverse after a change from high to low of 10% or greater.
All other movements less than 10% would be ignored.
To explain - if stock/index price moved from 100 to 109, the ZigZag indicator would not draw a line as the move was less than 10%. However if the stock/index price moved from 100 to 110, then the ZigZag indicator would draw a line from 100 to 110.
Then if the stock/index price continued to rise to 114, this line would be extended to 114 (100 to 114). The ZigZag would not show any reversal until the price declined 10% or more from its highest point.
Simple concept Example: â€¢ A fast Zigzag pattern to flag a possible change in trend. â€¢ A medium Pattern to determine if this change has been confirmed â€¢ and a longer pattern to insure that you are trading with the greater trend --Albruno 14:50, 10 June 2007 (BST)