If you're looking to enhance your trading strategy, the ZZ Color Retracement indicator is a game-changer. Built on the foundation of the Simple ZigZag indicator, this tool goes a step further by analyzing wave movements. It clearly distinguishes between long, strong impulse movements highlighted in blue and shorter retracements marked in red, while medium-sized waves get a neutral gray treatment.
Automation plays a crucial role in modern trading, especially when it comes to graphical constructions like channels, trends, and Fibonacci grids. To define a "refined movement," or the price action from local minimum to maximum (and vice versa), the ZigZag indicator proves to be exceptionally effective at identifying these shifts, as well as pinpointing local highs and lows.
Previously, I shared a straightforward algorithm for identifying local highs and lows, which you can check out in the Simple ZigZag. What sets this version apart is its streamlined algorithm, making it faster and easier to use, plus it comes with just one parameter: typical correction depth.
The ZZ Color Retracement takes this concept further, automating the analytical capabilities of ZigZag constructions. It detects significant impulse movements and colors them blue, while short corrective movements flash red, and flat areas are shown in a neutral gray.
Here are the key inputs to adjust the indicator:
- Typical retracement size: This is inherited from the Simple ZigZag.
- Moves averaging period: This defines the number of ZigZag movements used to calculate the average movement.
- Percentage difference: This represents the threshold ratio of the last ZigZag movement to the moving average. If the ratio exceeds 1 + parameter, it's deemed an impulse; if it's below 1 - parameter, it's corrective; and if it falls in between, it's considered flat.
Now that we have the ZigZag detecting impulse movements, the next step is to incorporate the Fibonacci grid into our analysis.
