Each of us
is faced with the problem that when there is a trend, all strategies work
like clockwork, but when it starts sawtooth movement "up and down",
even good, proven forex strategy suffer losses. So how do you determine when it
is not necessary to go into the market? This will help us CMI (Choppy
Market Index) - an indicator of market volatility.
Choppy
Market Index -
a simple indicator that calculates the difference between the closing of the
last (for now) the bar and closing the N bars ago and then divides that value
by the difference between the highest and lowest HIGH LOW of these bars. The
resulting number is then multiplied by 100 to give a visual representation of
"instability" of the market in the range from 1 to 100.
Indicator,
as well as a strategy based on it (see below), invented by Daniel Fernandez,
the material on trade with CMI was published in the August issue of Currency
Trader.
After
installing the Choppy Market Index on the chart (any timeframe and currency
pair), we obtain a similar picture:
As many have
already guessed - the smaller the value of the indicator, the more unstable
market. And the higher the value, the more clearly the presence of a trend.
Turning point (ie, when we can say that the trend has changed to strange
movement and vice versa) is about the same level as 50.
The author
also offers us a strategy based on the CMI indicator for trading on the daily
charts. Interestingly, two sets of rules is proposed: to trade in a volatile
market and trade in the presence of a trend.
Rules
Strategy Choppy Market Index
Trading
in volatile market
1.
Buy
when the moving average (blue line) indicator below 40 CMI and CMI red line
itself.
2.
Sell
when the moving average (blue line) indicator below 40 CMI and CMI of the green
line.
3.
Exit
the position when CMI exceeds 50.
Trade in
a trending market
1.
Buy
when the blue moving average above 60 and the line color CMI - green.
2.
Sell
when the blue moving average above 60 and the line color CMI - red.
3.
Exit
the position when CMI falls below 50.
According to
the above strategy, I would not advise to trade, but rather is given to
understanding the indicator CMI, as well as its possible use for filtering
signals on trend-following strategies.
choppy_market_index .rar