Each of us is faced with the problem that when there is a trend, all strategies work like clockwork, but when it starts sawtooth movement "up and down", even good, proven forex strategy suffer losses. So how do you determine when it is not necessary to go into the market? This will help us CMI (Choppy Market Index) - an indicator of market volatility.
Choppy Market Index - a simple indicator that calculates the difference between the closing of the last (for now) the bar and closing the N bars ago and then divides that value by the difference between the highest and lowest HIGH LOW of these bars. The resulting number is then multiplied by 100 to give a visual representation of "instability" of the market in the range from 1 to 100.
Indicator, as well as a strategy based on it (see below), invented by Daniel Fernandez, the material on trade with CMI was published in the August issue of Currency Trader.
After installing the Choppy Market Index on the chart (any timeframe and currency pair), we obtain a similar picture:
As many have already guessed - the smaller the value of the indicator, the more unstable market. And the higher the value, the more clearly the presence of a trend. Turning point (ie, when we can say that the trend has changed to strange movement and vice versa) is about the same level as 50.
The author also offers us a strategy based on the CMI indicator for trading on the daily charts. Interestingly, two sets of rules is proposed: to trade in a volatile market and trade in the presence of a trend.
Rules Strategy Choppy Market Index
Trading in volatile market
- Buy when the moving average (blue line) indicator below 40 CMI and CMI red line itself.
- Sell when the moving average (blue line) indicator below 40 CMI and CMI of the green line.
- Exit the position when CMI exceeds 50.
Trade in a trending market
- Buy when the blue moving average above 60 and the line color CMI - green.
- Sell when the blue moving average above 60 and the line color CMI - red.
- Exit the position when CMI falls below 50.
According to the above strategy, I would not advise to trade, but rather is given to understanding the indicator CMI, as well as its possible use for filtering signals on trend-following strategies.
In the archives Choppy_Market_Index.rar:
- CurrencyTrader-Choppy Market Index Manual.pdf
Download Choppy Market Index