Trading Indicator Toolbox – Choppiness Index

Choppiness Index

The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. This week its the turn of the Choppiness Index (for a free 2-week trial CLICK HERE)

The Choppiness Index (CI) was authored by Australian commodity trader E.W. Dreiss. The CI may be used to determine if the market is consolidating or trending.

Choppiness Index

INTRODUCTION

The Choppiness Index (CI) is an indicator which attempts to distinguish between trending and sideways markets. Many indicators which determine trend are called directional indicators, meaning they show whether the market is in an uptrend or a downtrend. This indicator shows whether the market is trending or not, and that trend can be up or down; it doesn’t matter. It is up to the trader to use it to confirm their view of the market they are trading. With this indicator, higher values mean more choppiness, and lower values mean directional or trend trading. See the weekly S&P Index above and notice the trending areas in red and the choppy areas in blue.

The formula variables include the Average True Range over the past n candles, as well as the highest high over the past n candles. The values always fall within a certain range between 0 and 100. The closer the calculation is to 0, the stronger the market is trending. The thresholds used to determine trending or sideways are Fibonacci ratios. Any number above 61.8 signifies sideways or choppy markets, and any number below 38.2 identifies with a trending market, whether up or down. The upper zone is chop and the lower zone is trend.

This indicator is more of a confirmation, since it lags, then a leading indicator; nonetheless, it can be a useful, visual representation of the market cycle.

chartof S&P with choppiness index

USING THE CHOPPINESS INDEX TOOL

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Jody
Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.
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Jody

Jody

Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.

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