Choppiness Index indicator (CHOP), as the name suggests, was introduced to determine whether the market is choppy, that is whether it is range bound or whether the market is trending, that is the market is following a particular trend in either direction. The indicator is not directional. The values do not help to create any position in the market. The indicator shows the present trend, no future price projection is possible through this indicator. Higher values of this indicator mean that market is within a tight range and thus it’s choppy, whereas lower values mean the market is following a definite trend. Zerodha Kite is equipped with this technical indicator in their indicator library.
How to set up CHOP in Zerodha Kite?
- Go to MarketWatch.
- Choose the stock you are going to trade.
- Right click on the stock and select chart from graphic icons.
- Chart window of the stock opens.
- Go to studies. Select studies.
- Go to Choppiness Index and click on it.
- A small window opens with default parameters of the indicator.
- Once the parameters are selected, the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on stocks price.
Choppiness Index Indicator Formula:
How to trade intraday using Choppiness Index?
- The indicator shows price trends only.
- The picture above shows Reliance Industries stock price movement with respect to the indicator.
- The chart shows 1 min. timeframe.
- The strategy shows the price trend. Understanding price trend from this indicator is important before creating a position.
- In 1 minute chart, traders may find many whipsaws which will be eliminated if longer time frames are used and this indicator is used with a combination of other indicators.
- High values of CHOP shows the market is range-bound.
- Lower values of CHOP shows the market is following a definite trend.
By default, the upper threshold in the Choppiness Index indicator is set at 61.8 while the lower threshold is set at 38.2. So higher readings above the upper threshold denote a rangebound and choppy market and readings below the lower threshold denotes a directional market. You can use some other trend following indicator to trade the trends in a lower CHOP reading.
So the basic usage of the Choppiness Index indicator is to find out whether the market is trending or choppy. This indicator can be categorized in the same category of ADX/DMS indicator or the Aroon indicator as these indicators also identify a trending or non-trending market.
Categories: Technical Indicators