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Choppiness Index

Developed by E.W. Dreiss, the Choppiness Index was designed to be a simple yet practical way to help a trader determine if the market prices are trending or consolidating. It is similar to the ADX (which is also designed to evaluate the strength of a trend and determine if the market is trending or consolidating), however, Dreiss considers the Choppiness Index the superior of the two indicators.

 

The Choppiness Index uses a scale between 0 and 100. It also typically uses upper and lower bands at 61.8 and 38.2 respectively. The Choppiness Index is constructed by first calculating the true range for each period and summing those values over n-periods. Second, it calculates the highest high value and lowest low value over n-periods and calculates their difference. Third, it divides the sum of the true ranges and calculates the base-10 logarithm of the value. Finally, it divides this value by the base-10 logarithm of n-periods and multiplies the results by 100.

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Interpretation

The Choppiness Index does not determine in which direction the market is moving. Its basic premise is that the more heavily the market is trending over the last n-periods the closer to zero the Choppiness Index will be and the more heavily the market is consolidating (i.e. moving sideways or becoming "choppy") over the last n-periods the closer to 100 the Choppiness Index will be.

Choppiness Index values above 61.8 indicate that the market is likely “choppy” (i.e. moving sideways and consolidating). Higher values typically occur during/after a strong consolidation phase. Higher values could also be interpreted as a warning sign of potential upcoming breakouts after significant consolidation has occurred.

Choppiness Index values below 38.2 indicate that the market is likely trending. Lower values typically occur during/after a strong trending phase. Lower values could also be interpreted as a warning sign of potential upcoming consolidation and choppiness after a strong trend phase has occurred.

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