There is constant confusion and consternation about the use of repainting indicators in a trading system. Yes, they can drive you nuts, but if approached correctly, they can be beneficial. Of course, a simple price action approach can be adopted (similar to many YouTubers); however, if you plan to use my trading system, then this is for you.
This is how I filter the zee alert signals.
A zigzag-based indicator, such as the Zee SupportResistance or the Zee Alerts indicator, identifies significant price swings by connecting highs and lows while filtering out minor fluctuations (typically based on a percentage or point threshold, e.g., 5% change). It generates potential trading signals like:
- **Buy signals**: When the indicator forms a new swing low (indicating the end of a downtrend and potential reversal upward).
- **Sell signals**: When it forms a new swing high (indicating the end of an uptrend and potential reversal downward).
However, zigzag signals can be noisy or prone to false breakouts in ranging or choppy markets, as the indicator is retrospective and repaints. To filter these signals for higher-probability trades, we can incorporate price action concepts such as supply/demand zones, fair value gaps (FVGs), order blocks, and price imbalances/inefficiencies. These act as confluence factors, confirming that a zigzag signal aligns with areas where institutional or smart money activity is likely, reducing whipsaws and improving risk-reward ratios.
Below, I'll explain each concept briefly and how it can be used to filter zigzag signals. The process typically involves marking these zones on a chart (using higher timeframes for context, e.g., daily for intraday trading) and only taking zigzag signals that occur at or near them.
### 1. **Supply and Demand Zones**
-
**Concept**: These are horizontal areas on the chart where price has previously reversed sharply due to an imbalance between buyers (demand) and sellers (supply). Demand zones are below the current price (support, where buyers overwhelm sellers), while supply zones are above (resistance, where sellers dominate). They form around bases of consolidation before strong moves and represent untapped liquidity.
-
**Filtering Zigzag Signals**:
- For a zigzag buy signal (new swing low): Only enter long if the swing low forms within or just above a demand zone. This suggests buyers are defending the zone, increasing the likelihood of an upward reversal. Ignore signals in no-man's land (away from zones) or near supply zones.
- For a zigzag sell signal (new swing high): Only enter short if the swing high forms within or just below a supply zone, indicating sellers are stepping in.
-
**Practical Tip**: Use multi-timeframe analysis—e.g., identify zones on H4 charts and filter zigzag signals on H1. Set stops below/above the zone and targets at the opposite zone. This filters out ~50-70% of false signals by ensuring alignment with market structure.
### 2. **Fair Value Gaps (FVGs)**
-
**Concept**: FVGs occur when price moves rapidly (e.g., due to news or momentum), skipping over a range without balanced trading, creating a "gap" in the price profile (visible as a void between wicks or bodies on candlestick charts). Price often retraces to fill these gaps as markets seek efficiency.
-
**Filtering Zigzag Signals**:
- For a buy signal: Confirm if the zigzag swing low coincides with an unfilled bullish FVG (a gap created during a downward impulse, now acting as support). Enter long only if the price is approaching or touching the FVG, as it may act as a magnet for reversal.
- For a sell signal: Use bearish FVGs (gaps from upward impulses, acting as resistance) to validate zigzag swing highs. If the signal forms near an unfilled FVG above price, it suggests a high-probability short as price fills the gap downward.
-
**Practical Tip**: FVGs are time-sensitive; prioritise recent ones (e.g., within the last 1-2 weeks). Combine with volume profile tools to spot low-volume gaps. This filter helps avoid trading against momentum by waiting for the price to "balance" the inefficiency.
### 3. **Order Blocks**
-
**Concept**: These are the last bullish or bearish candles before a strong directional move, representing areas where large institutions (smart money) placed orders. Bullish order blocks (OBs) are at the base of uptrends (support), while bearish OBs are at the top of downtrends (resistance). They often overlap with supply/demand zones but are more precise, focusing on the final candle of consolidation.
-
**Filtering Zigzag Signals**:
- For a buy signal: Take the trade only if the zigzag swing low aligns with a bullish OB (e.g., the low of the last green candle before an up-move). This indicates institutional buying interest, filtering out weak reversals.
- For a sell signal: Validate with a bearish OB at the zigzag swing high (e.g., the high of the last red candle before a down-move), suggesting institutional selling pressure.
-
**Practical Tip**: Mark OBs on higher timeframes and use them as entry zones with tight stops (just beyond the block). If a zigzag signal breaks an OB without reversing, it's a sign of a structure break—avoid or flip the bias. This adds institutional context, filtering random zigzag pivots.
### 4. **Price Imbalances/Inefficiencies**
-
**Concept**: These refer to rapid, one-sided price moves (e.g., long wicks or steep impulses) that create inefficiencies, such as unfilled liquidity pools or displaced price levels. Similar to FVGs but broader, they include areas where order flow was imbalanced, leading price to revisit for rebalancing (e.g., via retracements or ranges).
-
**Filtering Zigzag Signals**:
- For a buy signal: Filter positively if the zigzag swing low occurs near a downward inefficiency (e.g., a steep drop leaving a liquidity void below). Price may rally to balance it, confirming the signal.
- For a sell signal: Use upward inefficiencies (e.g., a sharp rally creating a void above) to filter zigzag swing highs, as price could pull back to address the imbalance.
-
**Practical Tip**: Identify inefficiencies using tools like Market Profile or session highs/lows. Only trade zigzag signals if they resolve an inefficiency (e.g., price wicking into it). This filter emphasises efficiency-seeking behaviour, ignoring signals in balanced, ranging areas.
### Overall Strategy and Example
To integrate these effectively:
- **Step 1**: The zigzag indicator plots the potential reversal points on the chart.
- **Step 2**: Mark the filtering zones (supply/demand, FVGs, OBs, inefficiencies) on a higher timeframe for bias (e.g., bullish if above a demand zone).
- **Step 3**: Wait for a zigzag signal, then check for confluence—at least 2-3 filters aligning increases conviction. (sub-window indicators)
- **Step 4**: Enter with risk management (e.g., 1% risk per trade, target next zone).
This approach turns a zigzag-based indicator from a lagging tool into a structured system by prioritising high-probability zones. Always practice on demo accounts first.
Regards,
Beatle
