The Choppy Market Index or CMI indicator

Written by Tim T.

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The CMI is a simple indicator that gauges whether the market has behaved in a choppy (non-directional) manner or a trending (directional) manner. The indicator calculates the difference between the most recent bar's close and the dose n bars ago and then divides this value by the differ­ence between the highest high and lowest low over these n bars. This value is then multiplied by 100 to give us a nor­malized value between zero and 100:

CMI = ((ABS(C[0]-C[n]))/(H[n]-L[n]))*100 Where

ABS = absolute value

C[0] = most recent close

C[n] = close n bars ago

H[n] = highest high of past n bars

L[n] = lowest low of past n bars

When the CMI is high (near 100) it means the difference between the most recent close and the close n bars ago is nearly as large as the high-low difference during that period (i.e., trading has been directional), while a low CMI value implies the market has moved in one direction and then reversed (perhaps more than once) — that is, it has been in a choppy, trading-range environment. Notice the CMI gives no information about whether the market has been moving up or down overall; it simply measures the market7s degree of choppiness, regardless of direction.

Because the raw CMI tends to fluctuate wildly, it is often smoothed with a moving average. The following system

uses a 60-period CM! smoothed with a 10-period simple moving average (SMA).

 

A CMI system

The easiest way to build a daily strategy that can profit from both ranging and trending conditions using the CMI is to design two sets of entry and exit rules that tackle these problems separately

The first entry rule will tackle the range problem, while the second one will tackle the trending problem. The range part of the strategy assumes drops in the CMI (reflecting a choppier environment) imply a completion of the current range (a move in the opposite direction of the most recent 20-bar dose-to-close move), while the trending strategy assumes a higher CMI (reflecting a trendier environment) implies a continuation of the most recent 20-bar close-to- close move. Both strategies will exit positions when the CMI crosses the median line of 50, which suggests uncer­tainty about whether the market is ranging or trending.

Range strategy rules:

1.  Enter a long when the 10-bar SMA of the 60-bar CMI is below 40 and the difference between the current bar's close and the close 20 bars ago is negative.

2.  Enter a short when the 10-bar SMA of the 60-bar CMI is below 40 and the difference between the current bar's close and the close and the close 20 bars ago is positive.

3.  Exit trades when the CMI moves above 50.

Trend strategy rules

1.  Enter a long when the 10-bar SMA of the 60-bar CMI is above 60 and the difference between the current bar's close and the close 20 bars ago is positive.

2.  Enter a short when the 10-bar SMA of the 60-bar CMI is above 60 and the difference between the current bar's close and the close 20 bars ago is negative.

3.  Exit trades when the CMI moves below 50.

age true range (ATR):

Lot Size = 0.01‘(account balance)/(contract size *

14-day ATR)

For example, assuming a $100,000 account balance, $100,000 contract size, and a 14-day ATR of 0.0123, the trade size would be:

(0.01*100,000/(100,000*0.0123)) = 0.81, or $81,000.

Although the strategy does not use a hard stop-loss, the exit rules adequately limit risk since moderate changes on the daily chart will cause the CMI to rise or fall sig­nificantly, causing trades to be closed (if the change was unfavorable) or remain open (if the change leads to further profits).

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