This post will help you understand the different terms in creating 3LZZ Semafor (3 level zz semafors).
I’ve used 3LZZ_TRO_EXT.ex4 (MT4) in my examples here:
Contrary to what is shown in the chart, Semafors are not reversal points. They are simply high and low points.
Because of this, when a new high/low is created, the semafor will shift to the new bar. So one must be very careful in trading semafors.
It is important to wait and see that the reversal is actually real.
You can use tools such as:
- half direction or Supertrend To see if the trend has already reversed.
- pivot points or Vibo or SR To see strong support/resistance levels. Where reversal is most likely
- strong the sound Bars which means buyers of the bullish bar (green) or sellers of the bearish bar (red) are increasing making the reversal stronger
3LZZ uses 3 types of points.
Semaphore 1: Smaller highs/lows
Semaphore 2: Medium
Semaphore 3: Longer
All of these are used zigzag to calculate Semaphore points. The period is actually called the depth in the zigzag indicator. and skew and back step separated by commas:
Semaphore 1: Depth: 5, Deflection: 1, Rear: 3
Semaphore 2: Depth: 13, Deflection: 8, Rear: 5
Semaphore 3: Depth: 34, Deflection: 13, Rear: 8
You’ll notice that these are all numbers from the Fibonacci sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on. 🙂
- Deviation (percentage) – the minimum price change required for the indicator to form a top/bottom.
The percentage change representing when the trend changed.
For example, if the price drops 5% from the highest level, the Zigzag indicator shows a red line that is falling back, which indicates that the trend has changed.
- Depth (number of bars) – the minimum period during which the indicator will draw a new high / low if the deviation changes.
So within the ‘depth’ (period) number of bars, there can be no further high/low.
- Backstep (number of bars) – The number of bars (candlesticks) required to separate two local opposites. In this interval, no new highs/lows will be drawn if they differ in volume from the previous levels. So the background should be less than the depth. Otherwise it does not work.
Let’s take the default values:
Therefore, it will look at the past 12 bars (depth) and find the highest highs and the lowest lows. The distance between the two levels must be more than 3 bars (backstep).
Now, let’s say the last maximum level was low. Few back rails (more than Backstep 3).
And now at the current bar the price is deviating more than 5% up. Then it will create a red squiggly line to the top of this new strip.
If in the next bar the price is still moving up, the squiggly line will move to the new high.
Suppose more than 3 bars (backstep) have passed again. And the price is now down 5%. Then a new squiggly red line will be drawn to the bottom of this new bar.
And so on and so on…
Check out the free Simple Semafor Scanner:
And the 3LZZ scanner is more complex with a different strategy: