Like the Chop Zone, the Choppiness Index gives you a visual representation of the choppiness of a given market or security.
The Choppiness Index is a non-predictive indicator used for showing the volatility of a security in a given market. When the indicator turns up, the amount of choppiness or volatility in the market increases, while the inverse is true when the indicator turns down.
How to read the Choppiness Index
The choppiness index oscillates between 0 and 100. When the value increases closes to 100, the higher the amount of choppiness there will be in the market. Choppiness can also be thought of as sideways movements. On the other hand, the closer the value is to 0, the stronger the trend will be in a market.
To determine if a security is in a trend or range-bound, some chartists like to use the 61.8 and 38.2 fibonacci retracement levels for dividing the two.
Signals generated by the Choppiness Index
The choppiness can help affirm and predict the directional movement of an index or security. When readings are above the 61.8 threshold, prices are more likely to become choppier and range-bound than to trend strongly in either direction.
On the other hand, a low reading during a strong trend can affirm that prices will continue moving in their present direction.
Anticipate changes in trend using the Choppiness Index
You can also use the Choppiness Index to help you anticipate changes in the overall trend. When a market or security has undergone a substantial period of consolidation, it’s therefore more likely to change into a ranging market than to continue its current course.
To spot this potential change, you should look for extended periods of choppiness along with other indicators taken from different calculations such as the MACD or the RSI for a change in the overall trend.