Choppiness is a modern indicator based on ideas of chaos theory and fractal geometry. Benoit Mandelbrot was the one person most responsible for the great interest in the subject of fractal geometry. He showed how fractals can occur in many different places in both mathematics and elsewhere in nature. They could be found underlying cloud formations, waves, leaves, fingerprints, and sunflowers, and his ideas provided some exciting glue between mathematics and nature. Using computer graphics and with the help of IBM, Mandelbrot was able to show how to express fractal geometry using computer graphics.
Figure 6 The classic Mandelbrot image
While most of us think there are only whole number dimensions, like 1D, 2D, and 3D, in fractal geometry there exist fractional dimensions in between the whole number dimensions. So there are a number of fractional dimensions between a 1D line and a 2D plane. Fractals are basically a measurement of the dimensionality of a system; they are able to express different images based on the fractional nature of dimension.
E. W. Dreiss, a trader based in Australia, came up with the creative idea of using fractal geometry as a way to measure price movement in a security. He cleverly assigned a "dimension" to a price movement chart. A chart that was trending and linear could be given the whole dimension of 1 while a chart that was totally choppy and not trending could be said to have a dimension of 2. Somewhere in between these two values represented fractional states and different degrees of choppiness. In the figure below we added a Choppiness indicator with the parameters set in the Preferences. A pane is inserted at the bottom of the chart and a blue line is used to indicate the choppiness index along the chart. If you select a different stock this study will continue to exist at the bottom of the chart, and will readjust for the new security.
Figure 7A Choppiness indicator
The Choppiness Index or CI varies between 0 and 100, the higher the index the choppier the price action is and the lower the index the more trending the price action. Since it is a trending indicator it has a length, which sets the look back period, here in the example its set to 14. There are two bands in the Choppiness indicator: Inside Band Color and Outside band color. The display only shows on of the two band colors, red if its insider the Upper or Lower bands and yellow if its inside the bands. The bands can be set but default to Fibanocci numbers of 38.20 and 61.80. When the choppiness indicator is under 38.20 it will display the red Outside band. If its above 61.80 it will display the yellow Inside band.
Dreiss explains the way he works with CI in an article in November 1991 Technical Traders Bulletin: "Low readings in the CI correspond closely with the end of strong impulsive movements either up or down, while high readings occur after significant consolidations in the price." A good article on the subject of Choppiness by Gibbons Burke appeared in Futures Magazine in October of 1993. You can find a copy on the web at http://www.quote.com/quotecom/qcharts/help.asp?option=choppiness
Conventional Trading Wisdom
The Choppiness indicator has an inverse relationship to price action and a trend is considered broken when the CI is below the lower line and reverses. Again this does not tell you the direction of the market it just gives a fundamental different perspective on the change of a trend in general. You can see this in the Figure above at the right side of the chart where AOL's 14 day Choppiness has dropped below the red Outside band color, indicating maximum trending and hence minimum choppiness. If you look at the price chart you can see that the bullish uptrend that started around the 14th of August, now appears to be broken. If other signals confirmed that this is a turning point, it could likely that we are headed towards a new trend direction down and it might be a good time to sell, or go short.
Is this indicator available in MT4?
Not that i am aware of hoping maybe one of the guru's here could code it.
Comparing the two formulas (I dont have the exact for each but just what is written about the general structure and components), they seem to be very similar. I took the explaination you had pasted here, changed the FDI to a period of 14, as in the chart you found online, and noticed some interesting things on my own charts with FDI. Take a look at the image below. Green lines represent peaks in the FDI and red represent low values.
Peaks are showing up right before major movements (time to trade).
Low values are corresponding to the end of these movements (time to take profits).
It provides some value. As I am writing the index peaked and EUR just made a sharp turn downward right after it.
In the link I posted earlier the user was using a period of 1000 on his 1min charts for this indicator. He was taking a more or less macro perspective based on earlier writings in this thread. Not even sure if my computer can handle that much.
It really would be great if one of our resident geniuses could code this indicator.
As I was saying, I'm not sure the choppiness indicator is any much different than the FDI. They both essentially serve the same function if used like I described above. I actually used it the past couple trading days. I saw it happening over and over again, so I figured I would throw some money at it. It just gives you a good heads up on oncoming action. All I was doing was waiting for a peak to form (couple bars after) and trading in the direction of the price action. About as easy as you get.
I'll see if I can dig up the exact formulas but maybe someone out there might already know.
Please scroll down this list for different uses of the FDI.
Traders Tips - May 2003
One interesting comparison. In a couple of these they are taking lower readings of the index and playing bounces off of, what looks like hurst channels (lower channel - if just price, Dinapoli has some good reading on this subject) during the index reading, while also coinfirming with a Stochastic momentum oscillator. TP is when prices go back to norm (basic moving average). Index settings are for a longer time period. The Hurst component of the FDI measures strength of the trend. "Time and Money" charts are the setup. I want to see what Neuroshell would do with this!
TS formula should be in some article inside the TASC. Searching...
Choppiness index (applied formula from post #18)