A zigzag is a corrective pattern, it should be labeled with letters and comes with the a-b-c structure. The difference between a flat and a zigzag is being given by the fact that the Fibonacci retracement level for the b wave is a bit different between the two and also from the fact that the structure of wave A is different as well. In the case of a flat pattern wave a is corrective in nature (namely a lower degree zigzag or flat) while in the case of a zigzag wave a is impulsive. Taking into consideration that price is consolidating most of the times, you should expect such patterns to appear on and on regardless of what is the corrective nature of the price move.
For example, if price is forming a triangle, then it should be considered that all the legs of the triangle are corrective and they should be formed out of corrective waves of a lower degree, namely zigzags, flats, or derivations based on them. If the triangle is an expanding one, then those corrective waves are most likely to be zigzags.
Retracement Level for the B wave – 61.8% Rule
The most important thing to consider when trading on the forex market, be it with binary options or CFDs, based on a zigzag pattern is to look at the retracement level for the b wave. This level should not be bigger that 61.8% when compared with the previous wave a and this is important moving forward as we should place BUY orders / CALL options in an uptrend after we have a five waves structure for wave, the b wave that is not retracing more than 61.8% and then the c wave which should be a five waves structure as well.
Therefore, a zigzag, while labeled a-b-c it should have a 5-3-5 structure for those waves and this is mandatory.
Determining the Strike Price
Zigzags are powerful patterns in the sense that they represent the only corrective wave that resemble impulsive activity. Even more powerful than an impulsive move, a zigzag is a dangerous pattern to be fighting flows as in reality it is formed out of two impulsive moves of a lower degree. This makes the retracement for the corrective waves of a lower degree to be really small and insignificant and trying to pick a top or a bottom in such a pattern may prove to be a disaster.
Moreover, when a zigzag is channeling really well, implications for a complex correction are growing bigger and bigger and the moment price hits the other side of the channel should be seen as the strike price because that should trigger the end of the lower degree correction and the beginning of a new impulsive move.
ZigZag and Complex Corrections
If a trend, regardless if it is a bullish one or a bearish one, is formed out of two or even three zigzags, then the complex correction it is called to have one or two small X waves and two or three zigzags. All in all, in the case above we are talking about minimum four and maximum six impulsive moves or a lower degree so you can imagine the impact on trying to pick a top or a bottom.
What is of extreme importance is the retrace for the B wave as it should retrace into the territory of the previous wave A, even if only slightly. That is mandatory. Also, another thing to consider comes from the fact that, opposite to flats, a zigzag should have the C wave moving beyond the end of wave A. This helps one trader in taking a decision for buying call or put options or when a specific move is considered done.
Flats vs Zig Zags
Between the flat and zigzag, the later ones are the most powerful and they are not complicated in nature as one may think, as there are only three types, depending on the length of the C wave.
The normal one is the most common pattern as price tends to travel equal lengths for both waves C and A.
And then again, like any pattern or support or resistance level, the bigger the time frame, the stronger the support and resistance are becomes, in the case of zigzags this goes pretty much the same: the bigger the time frame, the stronger the implications and the bigger the expiration date for the option should be.
It goes without saying that after a bullish zigzag we should look to place BUY trades / CALL options by the time the C wave is completed, while after a bearish one we should look to buy PUT options/SELL CFDs. Again, mind the time frame the pattern is forming on as that is vital in having the right expiration date when trading binary options.
Make sure to watch the two videos in this educational article and you’ll have an idea about how to trade forex with binary options or CFDs based on a pattern like a zigzag and also the basics of identifying a zigzag.