Indicators: Congestion index

Automated-Trading 2018.04.13 10:58

A description from a Markos Katsanos book (Intermarket Trading Strategies) :

...

The age-old problem for many trading systems is their inability to determine if a trending or trading range market is at hand. Trend-following indicators, such as the MACD or moving averages, tend to be whipsawed as markets enter a non-trending congestion phase. On the other hand, oscillators (which work well during trading range markets) are often too early to buy or sell in a trending market. Thus, identifying the market phase and selecting the appropriate indicators is critical to a system's success. The Congestion Index attempts to identify the market's character by dividing the actual percentage that the market has changed in the past x days by the extreme range.

...

Unlike similar indicators, like the vertical horizontal filter (VHF) or Wilder's ADX, the Congestion Index is directional for the following reasons:

It is self-contained in the sense that it eliminates the need for a second indicator to identify the trend direction.
It is better in identifying trend reversals.
It provides more accurate readings in cases of temporary pullbacks.
The chart space is less congested.