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Hi all. I'm sure you looked at the picture above. No doubt you immediately made a clear distinction between the left side and the right side. On the left the market is falling like a stone on the right the price is jumping all over the place: choppy.
There were several attempts here in FF and at other places to build a "choppiness index" indicator. I found no successful results. I wonder if someone has good ideas about building an algorithm which is able to measure how choppy the market is. The motivation for not simply using my naked eyes is that I'd like to screen all the major currencies (28 pairs) on 3 TF. That's 84 charts to monitor 24x5.
Choppiness is usually measured with the ADX indicator. The ADX is designed to measure the strenght of the trend. The picture below shows that a trend can also be choppy. The "trendiness" and the "choppiness" are clearly two independent things. ADX is therefore not at all an indicator of the choppiness of the market. All the indicators or formula I could find make the mistake of considering choppy = ranging.
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Some people suggested the use of range bars or renko bars to remove the choppiness altogether. No choppiness = no need for an indi. Brilliant idea but look at the range chart below: constant range bar charts, at any range, can also be choppy!
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The more the market is volatile the more it's choppy. ATR measures the volatility. Too bad we just saw that range bar chart can also be choppy yet the ATR is constant on them. Conclusion: ATR is no good either.
I tried to scroll a chart bar by bar to see what I would consider a choppy market. I takes me 3-5 bars to notice a change between choppy/non-choppy. Sometimes I just couldn't decide! So I can't expect a crisp YES/NO indicator more a degree of choppiness. I can also expect up to 5 bars of lag (!).
Drawing a line from the close of the bar to the close 5 bars before you get this: choppy markets look like a webcob and steady markets form a thin ribbon. Perhaps there is something to dig in this direction...
No greed. No fear. Just maths.