Choppiness Index Technical Analysis and Choppiness Index Signals
Developed by E.W. Dreiss
Choppiness Index was built and designed to be an easy but practical technical indicator to help FX traders determine if prices are trending or consolidating.
This Indicator is similar to ADX which is also designed to gauge the strength or momentum of a price trend and determine if the market is trending or consolidating.
The Choppiness Index uses a scale of between 0 and 100. It also typically uses upper and lower bands at 61.8 & 38.2 respectively.
This indicator is plotted by first calculating the true range for each period and then adding the values of n-periods.
Second, it calculates the highest value and lowest value over n-periods & calculates their difference.
Third, it divides the sum of the true ranges and calculates base-10 logarithm of this value.
Finally, it divides this value by the base-10 logarithm of n-periods and multiplies the results by 100.
Technical Analysis & How to Generate Signals
Choppiness Index is a directionless indicator meaning it doesn't determine which direction the price is going.
Its basic principle is that the more heavily the market is trending over the last number of n-periods the closer to zero the Choppiness Index will be & the more heavily the market is consolidating that's heading sideways in a ranging or chopping manner, over the last n periods the closer to 100 the Choppiness Index indicator will be.
Indicator values of above 61.8 indicate that the market is ranging/ choppy (moving sideways and consolidating).
Higher values occur during/after a strong consolidation phase. Higher values could also be interpreted as a trading signal of a potential upcoming breakout after a significant consolidation has taken place.
Choppiness Index indicator values of below 38.2 indicate the market is trending.
Lower values occur during/after a strong trending phase. Lower values could also be interpreted as a signal of a potential upcoming consolidation and choppiness after a strong trend phase has occurred.
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