Forex Strategies Resources

96# Zig Zag Trading System

Price Action Forex Trading System based on ZIG Zag indicator

Submit by Janus Trader Written by (Astaklova) 27/05/2013

Overview:

Markets Traded – Forex, EUR/USD and GBP/USD;

Charts – 1 Hour, 15 Minutes;

Charting Software – MetaTrader4;

Indicators – ZigZag (MT4) (15,5,3);

ZigZag1 (custom) (100,75,15);

ZigZag2 (custom) (34,5,3);

Price Alert (level signal indicator, custom);

Description

Choose the right moment, the fortunate place, the secret bait, wait, wait, wait –

and boast your Big Fish! Sometimes the fish is lost, sometimes it is too small, but

the real fish lovers will always have their catch!

 

This approach has the greatest temptation which is trying to find the exact

reverse point of every swing. The main indicator is the price itself. All the ZigZags

only measure the possibilities and do not serve as signals. Basically we

determine the entry and stop levels and follow mechanically. When you get

accustomed to this primary principle you will be able to refine your trade paying

attention to the general market mood, patterns, divergences, etc.

It’s best to monitor the market on an hourly basis. The system can be adapted for

the 4-hourly charts as well.

Please note that this forex strategy may not be suitable for beginners as some of it

requires strict trading discipline. If you are a beginner and you continue working

with this system on a demo account it will be a perfect training of your

imperturbability.

Chart Setup

This Trading system uses 2 timeframes – a 1 hour chart (H1) and a 15 minute chart

(M15), or optionally a 30 minute chart (M30) and 4 hour chart (H4).

The trading situation is estimated mainly on the H1 chart and checked on the H4

chart. The trades are made on the M15 chart.

Add the following indicators with the settings shown below to the EUR/USD 1H

chart to create a template.

ZigZag (MT4) (15,5,3)

ZigZag1 (custom) (100,75,15)

ZigZag2 (custom) (34,5,3)

In the pictures  Zig Zag forex system in action.

Note: On Picuture you can see a lot of steelblue little arrows. They belong to

ZigZag1 indicator. When the price is moving further this indicator shows with the

little arrows where the first reverse signal appeared and how many times it was

repainted. The last level which remained fixed is marked with a big green arrow.

 

ZigZag2 indicator doesn’t have the function of such additional arrows.

Save the template.

Open a new H1 chart for the GBP/USD pair, load the template.

Open two more charts - EUR/USD M15 chart and GBP/USD M15 chart.

Add the price alert indicator to the M15 charts.

Zig Zag Trading System
Zig Zag Trading System

To avoid the sound of the alert line – select the line with the double click and

move it to some other place. If you don’t know the control level is, just move the

control line somewhere else on the chart.

Keep the H1 charts open to watch the market. The M15 charts are usually

minimized. You will need them only when a trade is coming up.

Traing System Rules

The essence of this Forex strategy is that we open trades when a candle closes at a

certain level. We accept a Stop-Loss when a candle closes at certain level. NOT

by TOUCH, but ONLY at CLOSE.

If you don’t wish to be glued to the computer waiting for those levels you can use

the Price Alert indicator. Put the line on the desired level and you will hear a

sound if/when the price touches the line. Then you can wait for the price to be

fixed at the control level.

Entry Rules

We assume that every reverse movement can start when indicated by the arrows

of our ZigZags and will continue until the appearance of a ZigZag arrow in the

opposite direction.

1. Wait for a ZigZag arrow. Evaluate its significance – check if there is a

corresponding arrow on the H4 chart.

a. If the H4 chart has a similar arrow – A reversal is a high possibility.

b. If the H4 chart does not have a similar arrow yet – The continuation

movement is very probable.

c. If the H4 chart does not have a similar arrow yet but you have doubts

about the trend strength – Wait.

2. Switch to the 15-min chart. When any 15-min candle closes at 40 pips or

more from the minimum/maximum pointed by ZigZag arrow - open a BUY

(if you had a minimum) or a SELL (if you had a maximum). If the 15-min

candle closed at MORE than 50 pips from the control level (that is more

than 90 pips from min/max) – don’t trade. Pullback is highly possible. If so

open at the pullback.

3. Switch to the 15-min chart. When any 15-min candle closes above the

maximum or below the minimum pointed by the ZigZag arrow - open a

BUY (if you had a maximum) or a SELL (if you had a minimum).

If you prefer to trade only the reversals but the min/max has moved to a

new position – move your control level and so on, until your “bait is

swallowed”.

Important: Move the entry control level only once in an hour, at the

closing of the candle.

Optional: You can trade the situations indicated with the red line ZigZag with the

same approach but with the only difference. Always control the virtual Stop-Loss

on the M15 chart (not on 1H chart). It is safer to take the trades following the

direction of the ZigZag arrows.

Optional: If you have little spare time you can trade on the H4 hour chart. Check

the ZigZag arrows on the H4 chart. Control your entry/stop levels on the 1H

chart.

 


Stop-Loss Rules

Put a standard MT4 stop order as a “panic” Stop-Loss at 200 pips.

The real Stop-Loss will be VIRTUAL.

a. For reversal trades. Accept the Stop-loss if any hour closes lower than the last

minimum (for a BUY trade) or higher than the last maximum (for a SELL trade).

For the conservative style you can use this approach on the M15 charts. That is -

If any 15-min candle closes lower than the last hourly minimum (for a BUY trade)

or higher than the last hourly maximum (for a SELL trade).

Use the Price Alert indicator to control these levels.

b. For continuation trades. Accept the Stop-loss if any hour closes lower than the

control level of 40 pips from the last maximum (for a BUY trade) or higher than

the control level of 40 pips from the last minimum (for a SELL trade).

For the conservative style you can use this approach on the M15 charts. That is -

If any 15-min candle closes lower than the control level of 40 pips from the last

maximum (for a BUY trade) or higher than the control level of 40 pips from the

last minimum (for a SELL trade).

Use the Price Alert indicator to control these levels.

Put in a breakeven for EUR/USD at 35-40 pips, for GBP/USD – at 45-50 pips. If it

is really your trade – it will remain untouched. If the price comes back from 40-50

pips levels – an opposite movement can be expected, very likely. At best you will

be able to start again from the 15-min chart.

Take Profit Levels

«If not eaten – at least bitten.»

Switch to the 15-min chart. Wait for an opposite ZigZag arrow. This could be a

first target.

Switch to the 30-min chart. Wait for an opposite ZigZag arrow there. This will be

the second target. Don’t forget to protect at least 10 pips of your trade.

Wait for an opposite ZigZag arrow on the 1H chart. Or even on the 4H chart.

When you have enough equity you can double or triple your trades and apply

different profit targets for them, closing the trades step by step.

 

Short Trade Example

Perfect short trade

On the next H1 chart we have a maximum and two ZigZag arrows at 1.3093. Our

SELL trade will take place if the 15-min candle closes below the 1.3053 level

marked with the dash blue line.

Pic.3

Checking the H4 chart:

 

Zig Zag Trading System
Zig Zag Trading System

Switch to M15 chart.

 

The candle that closed lower than our control level was a valid signal (it closed at

1.30305). The SELL trade was open with the market order at 1.3035. The Stoploss

level was 1.3093.

If we return back to pic.3 (the H1 chart) we see that the stop level was not

touched.

The profit could be taken somewhere at the candle marked with the pink “X”

when the first opposite arrow on the M15 chart appeared (approximately 170

pips).

If we wait for the second profit target on the M30 chart it could be approximately

210 pips, see the orange “X” on the pic.6. It is a very decent profit for the

EUR/USD pair and it is certainly time to close the trade.

 

Zig Zag Picture 6
Zig Zag Picture 6

Long Trade Examples

Losing long trade

On the pic.below, in the pale blue zone we see a lot of signals. The price is moving

lower and we also move the control entry level and monitor the M15 chart. On

the H4 chart there was also a corresponding arrow.

 

At last the 15-min candle (marked with the red arrow) closed at 1.2647 that is

above the control level (blue dash line at 1.2641), see pic.14. We open a BUY

trade at the next candle, at 1.2643. The stop-loss level is at 1.2601

 

We return to the H1 chart and see that several hours later the candle marked

with the red “X” closed below the stop-level line. We close the trade. The loss is

approximately 50 pips.

 

Special opportunity for a long trade

On the chart in pic.16 in the pale blue zone there are no arrows. But please pay

attention to the previous up-arrow. We are very close to its level and it is possible

to use it as a trading setup. The control level for a BUY trade will be at 1.4174,

the stop-loss level will be at 1.4134.

 

Long trade with good potential but small result

The candle marked with the red arrow has a steelblue arrow. There was a main

reverse signal from ZigZag1 indicator. Now, when preparing this example, the

situation has already changed and ZigZag1 moved lower.

But at that moment, on February, 12, it was a signal for a coming trade. The stop

level is marked with the red dash line (1.2720), the entry level is marked with the

blue dash line (1.2760).

 

Let’s check the H4 chart

 

There were no strong signals at that moment on H4 chart. There was a signal

from the red line zigzag, but it is considered optional. So we should be very

careful if we decide to take a countertrend trade.

Let’s go to the M15 chart

 

The candle marked with “A” closed above the control entry level and we opened

a BUY trade at 1.2775. Soon after, the price was well up (about 70 pips) and we

put the protective stop in at 1.2785. At the moment marked with the red “X” the

trade was stopped with +10 pips result.

What could be done not to lose this trade which immediately turned profitable

again?

We could take those 70 pips trusting our intuition and experience – not bad for

EUR/USD. But this approach is beyond the discussion for the moment.

Within the basic system principles we could do two things.

a. When you see that the price is going nowhere – find the support level (here it

is marked with the green dash line). When the 15-candle closed below this level,

we could close the trade.

b. When the trade was stopped we could immediately reopen it with the same

stop-level at 1.2720. But since there were no clear signals on the H4 chart it

could be rather risky.

 

You should have good discipline to use virtual Stop-Losses.

If you hate stops – trade with very small lots and without virtual stop-losses. May

be you will have luck and the price will turn to your favor. If not – you will get the

panic” Stop at 200 pips. You can’t neglect this last Stop. It could be a trend, and

this strategy is not for trends, basically.

If you chose to trade this system – you can use your other favorite indicators to

determine the market mood. More over, it is very advisable to use all your

experience and look for patterns, divergences, etc. which could help to determine

the possibility of the reverse.

But if you use your indicators for signals – it will be absolutely different system.

Here we only need to find the control entry/stop levels and follow them

mechanically.

 

Trading System
Zig Zag Trading System.rar
compressed file archive [9.7 KB]
Download

Share your opinion, can help everyone to understand the forex strategy.

Write a comment

Comments: 2

  • #1

    Thomas (Tuesday, 29 October 2013 03:33)

    I can't understand what is 'b. For Continuations Trades' of 'Stop-Loss Rules' part.
    Is it a separate setup?

  • #2

    MadaForex (Friday, 07 November 2014 07:41)

    Thank you very much.
    Thierry

  • loading