Recently someone showed interest with regards to the “Choppiness Index”. The index is used by http://www.tradingconceptsinc.com/fractal-energy-trading/ and they have a video that explains how they use it in their trading. There is also a wealth of written material if you search it on the web.
I am quite interested with tools that provide a measure of a markets direction – up, down, trending, sideways, ranging, chopping or however one chooses to call it so I decided to implement it and see what it looks like.
In a nutshell, the index is similar to ADX in concept. It gives an indication of whether the market is trending or chopping/range bound. In that sense, it does not tell you if the market is moving up or down – it tells you if its trending or not.
It uses an ATR based formula to determine how much the market has moved in one direction over a period of time. The market range as determined by looking at the high for a period and the low for a period. Then, if the range is relatively small, the market is considered in a choppy state. If the range is bigger, the market must be trending. Once the range size is determined, the True Range is used to determine how big it is.
From the material online, values of the Choppiness Index that are above 61.8 indicate that the market is moving sideways. Values below 38.2 indicate a trending market. Values in between these one might consider as a potential shift between sideways and trending.
The indicator is shown below for Sierra Chart. The histogram at the bottom has 3 colors: choppy (light orange), trending (blue) and in-between (green).
For those interested, the indicator is presently available for Sierra Chart only.