ZigZag

A filter that connects significant swing highs and lows with straight lines while ignoring price moves smaller than a set threshold, distilling a noisy chart into its essential structure.

The ZigZag draws line segments between alternating swing highs and lows, but only registers a new pivot once price has reversed by more than a chosen percentage or number of bars. Smaller fluctuations are filtered out, leaving a clean skeleton of the trend's major turning points. It is best understood not as a signal generator but as a structure-clarifying overlay and a building block for other analysis — wave counting, pattern detection, and pivot scoring.

ZigZag makes the sequence of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) visually obvious, and frames the swings used in Elliott Wave counts, harmonic patterns, and Fibonacci retracements. The threshold setting controls sensitivity — a larger threshold shows only major structure, a smaller one captures more swings.

The critical caveat is that the classic ZigZag repaints: its most recent leg is provisional and will redraw if price keeps moving, because the final pivot is not confirmed until price reverses by the threshold. This means it must never be used as a real-time entry signal — backtests that ignore the repainting wildly overstate its accuracy. Used correctly, as a retrospective structure map and an input to pivot-based tools, it is reliable and objective. Used naively as a live buy/sell indicator, it is misleading. Implementations that confirm pivots only after the reversal completes (non-repainting) trade timeliness for honesty.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.