Published on: February 19, 2025
In technical analysis, traders use various chart patterns to forecast potential market movements. One of these patterns is the Zigzag in the Renko charting method, which can indicate indecisiveness or confusion within the market, often marked by frequent changes in direction.
What is a Zigzag Pattern?
The Zigzag pattern is a technical chart formation that typically consists of a series of four bricks with alternating colours. In the Renko charts, each “brick” represents price movement, and the alternating colours symbolise price reversals.
The Zigzag pattern, by definition, is one of indecisiveness. When the price fluctuates, frequently changing direction, it indicates confusion among market participants, as no clear trend is forming. This is visually represented by a series of Renko bricks changing their direction back and forth, creating a zigzag shape.
Bullish Zigzag Breakout Pattern
The Bullish Zigzag Breakout pattern occurs when a price breakout follows the Zigzag formation, with an upward swing or a bullish trend developing after the pattern. In other words, after the indecisive phase represented by the Zigzag, the price breaks out of the pattern to the upside, signalling a potential buying opportunity for traders.
How to Spot a Bullish Zigzag Pattern:
- Formation of Four Bricks: The Zigzag formation starts with four alternating-coloured bricks in Renko charts. These bricks represent alternating price movements, indicating a lack of directional bias in the market.
- Breakout to the Upside: After forming the Zigzag pattern, the breakout to the upside signals that the bulls are taking control. A strong upward price movement beyond the last high of the Zigzag pattern marks the breakout.
The Bullish Zigzag Breakout signals a shift in market sentiment from confusion to clarity, with the buyers now in control. When the breakout happens after a period of indecision, it indicates a potential reversal from a neutral phase to a positive, upward trend. Traders can take this as a signal to enter long positions, capitalising on the momentum that follows the breakout.
Bearish Zigzag Breakout Pattern
On the flip side, the Bearish Zigzag Breakout pattern occurs when, after a Zigzag formation, the market breaks downward, indicating that the bearish trend is likely to continue. This is the opposite of the Bullish Zigzag, where the price breaks out of the indecisive range to the downside.
How to Spot a Bearish Zigzag Pattern:
- Formation of Four Bricks: Similar to the Bullish Zigzag, the Bearish Zigzag begins with four alternating bricks, showing indecision within the market.
- Breakout to the Downside: Once the Zigzag is complete, if the price breaks down past the lowest point of the pattern, it signifies a Bearish Zigzag Breakout. This breakout indicates that sellers are now in control of the market, and the price could continue to decline.
The Bearish Zigzag Breakout signifies a shift from indecision to a potential downward trend. The breakout to the downside is often seen as a sign of increasing bearish pressure, and it can signal traders to enter short positions. As with any breakout pattern, risk management is key, but this formation offers a clear opportunity to capitalise on a downtrend.
As explained by Prashant Shah in his book on Renko Charts, the Zigzag breakout pattern is a vital component of the analysis process for traders using Renko charts. This method allows for the identification of trends with fewer distractions, helping traders focus on significant price moves.
Using Zone Web, you can easily automate the pattern on the chart by following these steps:
- Open Renko Chart (Cltr+R)
- Go to Pattern and Add Zigzag Bullish & Bearish
3. The ZG+ and ZG- will be highlighted on the chart
