It is based on historical price.It can remove the random noise and compare relative price movements.This indicator can help you to predict when a security’s momentum is reversing.It eliminates the random price fluctuations. Minimum price change parameter determines the percentage for the price to move in order to form a new “Zig” or “Zag” line.

The default value for the zig zag is 5%. This means that any counter move less than 5% will not generate a signal on the chart. Hence a trader will be able to ignore the countless minor moves that have no affect on the primary trend.The minimum price movements are set in percentage terms and can be based on either the close or high/low range.It is better tool to analyze the historical data ,it can measure retracements but is not good for making prognoses

Formula for Zig zag Metaquotes

http://codebase.mql4.com/download/1367

This formula for metastock is a copyrighted content and so we are just adding its link here

ZigZag Indicator tracks and connects extreme points of the chart, the distance between these points being equal or higher than the percentage specified for the price scale.

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It is a major reversal pattern used by many technical analysis to judge the future stock movement.It looks like formation of letter “M” ,where first a stock rises then drops and then another rise with same level and after it the fall.It indicates the sell signal,and it is better to get out of that stock at first signal. But i would suggest people to confirm it with other technical tools.As many people hurry to sell stock on first top and before second top but there might be more uptrend in that stock.But it is wisely suggested that a person should exit as if the movement of stock is not supported by volume.

If the peaks are too near,then they could just represent normal resistance rather than a lasting change in the supply/demand picture.Which means you will be taking action on deceptive analysis.

I would suggest to go through these article

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:double_top

Also have a look at the shushi roll from Mark Fisher. This pattern was named a sushi roll by Mark Fisher in his book, “The Logical Trader”.

http://www.investopedia.com/articles/technical/04/031004.asp

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