by Tom McClellan
Financial Sense
A high reading for the Choppiness Index means that a new trending move is likely to start. But it does not tell us in which direction.
The Choppiness Index was developed by Australian commodities trader E.W. Dreiss. The idea is to quantitatively describe how linear or non-linear the price action has been over the lookback period. For the chart above, that period is 14 trading days. The scaling is from 0 to 100, although prices generally do not approach those extremes. Dreiss noted that a reading below 38 was a sign that the recent trend has been extremely linear, and thus a non-trending period was likely to develop. Similarly, a reading above 62 says that prices have been very choppy, and thus that a new trending move is likely to develop.