I've been researching deep into the different types of market pivot detection, and the effects of each. The original legacy zigzag has its issues, but it's an elegantly designed machine which still has a purpose among the catalog of different types of zigzags and I'm going to talk about that.
This zigzag is often the only zigzag most people know about. Traditionally it's used to draw the market structure accurately and can be used to locate historical support and resistance zones where a breakout may occur on the change of structure.
In its real-time behavior, it is known to "pause and update" leg position frequently, and can (in the worst scenario) self-correct its current leg. That's because it uses an old algorithm where it tries to sort high and low candidates at the same time from a "sieve" of high and low candidates, which the indicator trusts are strong candidates after the deviation and backstep checks.
The pre-processing sieve causes artificial compounding lag because it's forced to work backwards.
The extreme candidate search is a backwards search, and backstep is another backwards search to "refine" the strongest candidate.
When you're aware of this, you might think about trashing this kind of zigzag in favor of a forward looking extreme algo.
However, what I discovered is that while the candidates are fleeting, directional momentum is the missing piece to make this zigzag a reliable detector of the markets direction, while also potentially providing reliable entry zones.
The time the leg pauses in this zigzag, it's a bet. It's a bet that this candidate might be the true pivot. It can be found instantly (without lag) when the leg has begun to pause its continuity, or in technical terms its "migration".
Take a Peak -> Bottom search for example.
The zigzag has no interest to anchor its bottom if the market keeps pushing lower. If the market pushes above slightly, but does not find a strong enough high candidate, this is the time the leg pauses. The zigzag has not found a candidate which is strong enough to make it switch the search, but the market isn't going lower either.
Then suddenly more volume comes in, and the market starts going lower again, the downward leg now starts to update again and move lower with the price. This is its normal running operation.
Every time the market reverses slightly (but not enough), it *could* be the new pivot, but the zigzag can't tell you.
When the zigzag does tell you, it means it found a strong enough opposing candidate, and that's the moment when it flips its leg and change its search.
That is when it's too late for you to get in on trading the low pivot.
Using directional momentum, we can measure the momentum every time the leg pauses in its "I'm not sure" state.
Directional momentum is a strong indicator that the market is really shifting, and this is how you can find the extreme price before the new leg forms.
This makes momentum-from-extreme-candidate a powerful thing.
If you're interested in this development, connect with me here as I am developing different kinds of extreme search solutions to enable finding actual market entries, and not just for illustrating neat market structure.
