Zig Zag Overview

The indicator that is to be created is based on the concept of recognizing local peaks and valleys where a price time series changes its direction from up to down (peak) and from down to up (valley). This indicator we will refer to as the ZigZag indicator.

A turning point (TP) peak is defined as the point where the high is higher than or equal to any other highs in the neighborhood of the point.

A turning point (TP) valley is defined as the point where the low is lower than or equal to any other lows in the neighborhood of the point.

The ZigZag Indicator used takes a look at three settings Depth, Deviation and Backstep. The ZigZag indicator draws a connecting line between each of the consecutive turning points found by the indicator. The formula for the indicator can be found in the appendix section. The Fractal points displayed are from a common indicator with unknown code. Neither of these methods or provided code are necessarily the final method used to determine and find the turning points that will be used in the statistical model.

The above definitions are illustrated by an example graph below. The peaks and valleys are labeled for the Yellow ZigZag line. Within those peaks and valleys one can find minor peaks and valleys.

The ZigZag  algorithm does not just blindly search for the first consecutive valley after a peak (or a first consecutive peak after a valley). It needs to optimize on turning points and locates such peaks and valleys that a human expert would choose by looking at the chart. The method of optimization at this time is unknown and one of the answers to be found from this research. There are three inputs that need to be variable and optimized;
1. ExtDepth
2. ExtDeviation
3. ExtBackstep
There may be other ways to find or pro-grammatically these turning points and all options need to be looked at. Programmer input is also sought and desired with all parts to help in finding the best options for all sought after results. 

There is no requirement in this research module for a peak to be higher than the previous valley, and for a valley to be lower than previous peak. Our observations have shown that if such a condition were applied, then potentially no turning points could be established on vast portions of data. These data segments would then be lost to analysis.