April 15, 2014

Trading With ZigZag Patterns; SchoolOfTrade.com

In today’s video we take a look at the ZigZag Pattern. 

A very solid pattern that can get you in to some VERY solid and high percentage trades! 
It is very easy to find them and when you can find a good looking one, it can make you some serious cash!

The markets do not move straight up, down, or sideways, rather they move in the form of “peaks” and “valleys” as price-action moves higher and lower in the overall trend.  When combined together, these are called “ZigZag Patterns” and they produce high-percentage trading opportunities on every market around the world.

We can connect these “peaks” and “valleys” to form trend lines of support or resistance, and we can use that support and resistance to find entry opportunities into new trades both long and short.
Bullish ZigZag Pattern
Bullish ZigZag Pattern

A Bullish ZigZag Pattern is making new higher-highs and higher-lows as the price moves in an uptrend.  Furthermore, we can draw a trend-line connecting the lows of the pattern which we consider to be very strong support.

Bearish ZigZag Pattern
Bearish ZigZag Pattern

A Bearish ZigZag Pattern is making new lower-lows and lower-highs as the price moves in a downtrend.  Furthermore, we can draw a trend-line connecting the highs of the pattern which we consider to be very strong resistance.

ZigZag Indicator:
Ninja Trader has a ZigZag Pattern included with its charting package, which makes it very easy for anyone to look for these patterns.
We prefer to use Range-based charts, such as ‘JJ-Bars’ to find these ZigZag Patterns because these charts make it much easier to see the swings.
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How do you trade with a ZigZag Pattern?

Trading a Bearish ZigZag Pattern:
Day Trading ZigZag Pattern

The first thing you need is two highs in the sequence of ZigZags for a bearish set-up.  On the illustration above these are marked as #1 and #2 peaks.  Once you have peak #2, you will look for the entry short when we reach peak #3.

Entry Short:
Entry is triggered SHORT when you have created peak #3 and you see a bearish candlestick close at peak #3.
Place your Stop-loss:
Your stop-loss on this ZigZag Pattern SHORT is placed above peak #2, and should not risk more than 3% of your trade account.  Wait for a candlestick to CLOSE above peak #2 to trigger your stop-loss.
Place your Profit-target:
Your profit-target on this ZigZag Pattern SHORT is calculated by measuring the move from points A to B.  In this scenario, A to B is equal to C to D, so your profit-target will be the same length as the length from A to B.
Scale-Out & Trail the Stop-loss:
Furthermore, you can add an additional profit-target to ‘scale-out’ at the B-point of the sequence, and when you achieve that first profit-target you can move your stop-loss to point-of-entry and hold on for the final target at the D-point.
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