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Choppiness Index Analysis & Choppiness Index Trading Signals

Developed by E.W. Dreiss

The Choppiness Index was developed and intended as a simple yet useful technical tool to assist gold traders in determining whether prices are trending or consolidating.

This Indicator is similar to ADX which is also designed to evaluate the strength or power of a trend and determine if the market is trending or it is consolidating.

Choppiness Index Indicator MetaTrader 4 - How to Set Choppiness Index Indicator in Chart

The Choppiness Index operates on a scale ranging from 0 to 100, and it characteristically employs upper and lower boundaries set at 61.8 and 38.2, respectively.

The calculation for this specific indicator is achieved by initially determining the true range for every time period and subsequently summing the values over 'n' periods.

It also calculates the maximum and minimum values over n periods and determines their difference.

Firstly, it computes the total of the true ranges and then determines the base-10 logarithm of this figure.

Finally, this value is divided by the base-10 logarithm of the specified period and multiplied by 100.

Trading Analysis & Generating Signals

The Choppiness Index shows no direction. It does not say if prices head up or down.

Its basic principle is that the more heavily the market is trending over the last number of n-periods the closer to zero Choppiness Index indicator will be and the more heavily the market is consolidating that is heading sideways in a range or chopping manner, over the last n-periods the closer to 100 the Choppiness Index indicator will be.

Indicator values exceeding 61.8 suggest that the market is currently in a ranging or choppy state (moving sideways and consolidating).

Higher values show up during or after strong consolidation. They can signal a breakout soon after big consolidation ends.

Choppiness Index indicator values of below 38.2 reflect that the market is trending.

Lower numbers occur during/after a very strong trending time. Lower numbers might also be looked at & understood as a sign of a possible coming period of staying in place and jumps after a strong trend time has taken place.

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