Forex Technical Analysis: The ZigZag Trading Strategy using Stochastic Oscillators

Figure: Breaching EMA trading strategy with minor retracement

The zigzag indicator is one of kind indicator which can help us to find the impulsive wave and corrective wave. Professional traders use the zigzag indicator to identify the next possible move of the wave in the prevailing trend. After extensive analysis day, traders have come to the conclusion that this indicator works best with the prevailing trend and stochastic oscillator.

The trend line in this strategy works as the potential buying and selling zone whereas the ZigZag indicator helps to plot the four major points of the wave.  Let’s see how the professional trade this strategy:

Figure: Advanced zigzag trading strategy using the stochastic oscillator

Figure: Advanced zigzag trading strategy using the stochastic oscillator

In the above figure, a valid trend line is drawn by the three major connections points. Once the valid trend line is drawn professional traders looks for a, b, c and d wave. It’s imperative that before the formation of the d wave the pair makes a new higher high in the price. Once the pair makes the new higher high, traders look for the minor retracement in the price near the trend line support. After the price hits the trend line support with the descending wave D trader looks confirmation signal from the stochastic indicator. With oversold stochastic professional traders enter long in this strategy.

Setting the stop loss in this trading system quite easy compared to other trading systems. A tight stop loss is used by the trader which is set just below the trend line. Some professional traders look for price action confirmation signal in the trend line to enter the market. It’s true that trading with price action confirmation signal always gives better result but it also deprive us of the extremely profitable trade. Here the zigzag indicators work as a replacement of wave and help the trader to ride the new trade with the great level of accuracy.

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