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Seems like many indicators work reasonably well when prices are trending, not so well when prices are choppy or range bound. What's the best indicator to determine when an instrument is trending?
Can you help answer these questions from other members on NexusFi?
I look for chop using the T3 average on a 10 Range chart (I trade NG, CL and TF).
If the price action penetrates the T3 up and down three times (total), I consider this to be chop....although these metrics are not definitive - for example, price can sometimes break one range move up/down and stay in another range for the remainder of the session.
I think a failed "trend trade" is probably the best indicator your trend trade is now in chop. The premise of a trend is higher highs and higher lows, a failed trade is normally take out in the case of longs by a lower low. This generally means your trend is over or at least consolidating in preparation for continuation. Stay out of further trades until you see the trend begin to put in higher highs and higher lows again. Not fool proof of course but better than trying to use indicators to filter chop.
I basically know that after a nice move in my instrument, 90% of the time there will be some sideways movement. If I catch that move, I quit. No need to keep trading the crap.
Simplicity is the ultimate sophistication, Leonardo da Vinci
Most people chose unhappiness over uncertainty, Tim Ferris
I think that there is no usefull determination of "chop zones". If you have detected chop there is no prediction that the chop remains - without doing some studies before. I use statistical analysis to detect chop patterns at a specific time at a specific weekday at a specific instrument. You can assume that some chop zones are predictable (before news, europe / us session crossing and so on, low volume time periods). Now you can dig into it and make some statistical analysis to search for weekday, time and duration of chop zones. Then you can look if there is a statistical significance at that time slot. Then you can adapt your trading strategy to take that into account.
If I am looking at a daily chart, I may see what could be referred to as 'chop'.
But if I look at the same time period on a 60 min chart I could see a trend.
If the 60 min chart is looking choppy...
Perhaps I can look at a 15 min chart and see a trend.
If I see chop on a 15 min chart.
I can look at a 1 min chart and see a trend.
If I see a choppy 1 min chart.
I may look at a 377 tick chart and see the trend.
This can continue over and over and not just from longer to shorter time periods.
It also is true with the opposite or even with range or tick or any type of chart.
If you have an indicator that works on trending charts,
use a chart that is trending.
The point is, what is chop?
One charts chop is another charts trend.
If you don't like the 'chop' of one chart, then change to a chart that is trending.
I think you will find that during any period...
Some charts are trending, some charts are choppy.
The solution appears to be, use the right chart.
(if you use charts)
But if you watch what creates the charts...
chop / trend is not an issue.
After this week, will it really matter?
Weather forecast for this week.
Rejoice in the Thunderstorms of Life . . .
Knowing it's not about Clouds or Wind. . .
But Learning to Dance in the Rain ! ! !
Trading: Emini ES, Emini RTY (TF), Crude CL, Eurex DAX, Euronext CAC40, EuroFX 6E, and Hang Seng HSI
Posts: 47 since Mar 2011
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I don't use indicators to help me determine if its choppy or range bound. In contrast, I just use price action itself (no indicators) along with knowing how my trading instrument reacts to changes in volatility (e.g. expansion intervals, contracting intervals) and knowing how my trading instrument tends to react at certain times of the trading day when there aren't any influences by key market events.
Yet, your question is about indicators. Therefore, via traders I do know that are dependent upon indicators...they use price moving averages to help them to identify when price action is choppy and/or range bound. Therefore, you may want to explore the merits of using price moving averages.
Just be aware that the moment you identify what you're trading is too choppy or too range bound for you...there's no guarantee it will continue as such. Also, you've implied you're using indicators to trade trends (not chop or range). If you're using indicators that are designed for trading trends but in contrast you're getting trade signals in chop or tight trading ranges...your indicators or your application of the indicator is poor. Thus, you need to determine why you're getting trade signals in chop or tight trading ranges with an indicator that you're using for trend like price action.
Renko works pretty well intra-day in smoothing out the trend and separating it from congestion zones.
In terms of pure price action, if I can draw a well defined price channel around the trend, and a new price extreme in the trend direction fails to reach the channel line, that is often an excellent initial indication the trend is ending. In an uptrend for example, a new price high runs it's course but fails to reach the upper channel line. The trend will seem to run out of steam in the middle of the channel.
Increasing volume is a good confirmation tool while in the trend. I like to see equal or higher volume in each new leg in the trend direction. Once volume diverges from price (new price extreme on lower volume) then congestion is more likely. In an uptrend, a new price high with lower volume is a warning sign for me. I like to combine the volume divergence with a price momentum divergence using a reliable momentum indicator. Conversely, once in a trading range the longer price stays in the range the more the volume will 'dry-up', as more traders recognize the lack price range and thus diminishing profit opportunity.
Intra-day, once price enters congestion / chop, I always assume chop will continue until clearly proven otherwise. I never assume the market will quickly (or worse "might" or "should") break out of the range. Making that assumption in the middle of a trading range is sure death for trend traders.
Ranging market is often considered synonymous with chop. I differentiate between ranging and chop/congestion. Ranging is tradable with the proper trading method, congestion is not. Here's my view on chop/congestion, it was written over a year ago, but is still the same.
