Choppiness

The Choppiness Index is a simple indicator that measures the direction or trend of a market.  Its primary purpose is to identify the extent of a trend versus a choppy price action.  

 

Choppiness3.png

 

Choppiness uses a scale between 0 and 100.  The index has an upper and lower band (typically labeled with Fibonacci numbers of 61.80 and 38.20) and has a default length of 14.  Choppiness begins by calculating the true range from each period.  It sums the last 14 periods to get the total amount for that period.  Then it finds the highest true high and lowest true low in the 14 periods and takes the difference between them to get the height of the 14 period box range.  Then, it divides the sum of the true ranges by the 14 period and takes the logarithm of the result using a base of 10.  Finally, it divides this number by 14 and multiplies the results to achieve the Choppiness Index.

 

Choppiness2.png

 

ChoppinessMenu.png

 

When the Choppiness Index is under 38.20, it represents the more extreme lower range.  A market is considered trending when the index value is lower or if the index value is well below its average.  Low readings can also signify the ending of a stronger up or downward impulse wave movement.  For example, Apple (AAPL) remained in a major uptrend for months.  During this strong uptrend, there were occasional pullbacks, yet the overall trend continued back up once consolidation was complete.  The Choppiness Index constantly traded below 38.20 yet never extended to 61.80 or above.  The peak extremes represent consolidation phases and the trough extremes, most trading well below the 38.20 Fibonacci number.  This represents a very solid uptrend in progress.

 

Choppiness1.png

 

Choppiness4.png

 

When the Choppiness Index is above 61.80, it represents the more extreme upper range.  A market is consolidating when it has an upper range index value or if the index value is well above its average.  The higher the index value (or if the index value is well above its average), the choppier it is considered. High readings occur usually after significant consolidation phases.  A high reading can also indicate that a consolidation is about to end and that potential breakout moves should be monitored.

 

Choppiness5.png

 

There is an inverse relationship to price action and a trend when using the Choppiness Index.  A trend is considered broken when the Choppiness Index is below the lower band line and then reverses.  

 

The Choppiness Index is similar to the ADX (also designed to evaluate the strength of a current trend and to determine whether a market is trending or moving sideways).  E.W. Dreiss believes his Choppiness Index is superior because it may help a trader stay in the trends and out of whipsaw market periods.  

 

The Choppiness Index does not determine what direction the market is moving; however, it does display whether the market is trending, non-trending or whether it is showing hints of possible trend changes.

 

This index is also not to be considered a primary technical indicator but can be useful serving as a secondary confirmation tool if used with other helpful technical indicators.

 

History: Choppiness was designed by an Australian commodity trader, E.W. Dreiss, and it was born out of ideas expressed in Chaos theory and fractal geometry work of Benoît B. Mandelbrot .  The primary insight they offer is that market prices are not random but exhibit a statistical tendency to continue in the same direction over time.

 

Dreiss’ objective for the Choppiness Index was to define a simple yet practical way to determine whether prices are trending in a market or if prices are in a trend stage of less oscillation consolidation.  The basic idea is that when the market is heavily trending during the past N bars, the fractal dimension is close to 1 (one) and the Choppiness Index is around 0 (zero).

 

Menu Functions

 

Choppiness.png

Settings

The Default Length is 14 (trading days) and can be changed by clicking in the respective box and changing the value.

 

Display

The display type can be set to one of the following options: Line, Line with Bands, Line with Bands and Shading, and Line with Shading.

 

Line

The Color selector allows the user to change the color of the band and the Thickness selector allows the user to change the thickness of the band displayed.

 

Bands

The default value for the upper band is 61.8 and the lower band is set at 38.2. These values can be changed by clicking in the respective box and changing the value.

 

The Color selector allows the user to change the color of the band line displayed.

 

To save your modified settings to be applied to future charts, click Save As Default.  Once this is clicked at all times in the future the settings you have set will be applied to future charts when this study is added.

 

To return to the Factory Settings, click Factory Settings and then click Save As Default.  Once this done at all times in the future the Factory Settings will be applied to future charts when this study is added.

 

Click "Ok" to apply the Choppiness to the selected chart or click "Cancel" or "Remove" to exit the study without applying it.

 

Click "Remove" to remove the study from the selected chart.